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Zimmer (ZBH) Up 7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Zimmer Biomet (ZBH - Free Report) . Shares have added about 7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zimmer due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Zimmer Biomet Q2 Sales Suffer on Procedural Deferrals

Zimmer Biomet posted second-quarter 2020 adjusted earnings per share (EPS) of 5 cents in contrast to the Zacks Consensus Estimate of a loss of 72 cents per share. The figure however was way below from adjusted EPS of $1.93 in the year-ago period.

On a reported basis, the company registered loss of $1.00 per share against year-ago earnings of 65 cents per share.

A significant year-over-year decline in the company’s second-quarter revenues and margins, negatively impacted by the coronavirus outbreak, resulted in poor earnings performance of Zimmer Biomet.

Revenue Details

Second-quarter net sales of $1.23 billion decreased 38.3% (down 38% at constant exchange rate or CER) year over year. The figure however exceeded the Zacks Consensus Estimate by 31.7%. The company noted that the coronavirus pandemic resulted in significant deferral of elective procedures through the quarter. However, according to the company, the maximum decline in those procedures to date was seen in April 2020, with incremental improvement in May and June.

During the second quarter, sales generated in the Americas totaled $733.7 billion (down 39.5% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $218.7 million (down 49% year over year at CER). Asia-Pacific registered 18.2% decline at CER to $273.7 million.

Segments

Sales in the Knees unit declined 46.5% year over year at CER to $374.2 million. Hips recorded a 30.7% drop at CER to $329.7 million. Revenues in the S.E.T. (Sports Medicine, Extremities and Trauma) unit declined 28.7% year over year to $252.6 million.

Among other segments, Dental, Spine & CMFT (Craniomaxillofacial and Thoracic) dropped 37.4% at CER to $182.5 million. Other revenues were down 44.3% to $87.1 million.

Margins

Gross margin after excluding intangible asset amortization came in at 65.4%, reflecting a contraction of 538 basis points (bps) in the second quarter.Selling, general and administrative expenses declined 20.7% to $665 million. Research and development expenses declined 21.8% to $87.7 million. Despite the lower expenses, adjusted operating margin contracted 1896 bps to 3.9% during the quarter.

Cash Position

Zimmer Biomet exited the second quarter with cash and cash equivalents of $713.4 million compared with $2.43 billion at first-quarter end. Long-term debt at the end of the quarter totaled $8.21 billion, reflecting a rise from $7.72 billion at the end of the first quarter.

Cumulative net cash provided by operating activities at the end of the second quarter was $398.1 million compared with $584.6 million in the year-ago period.

2020 Guidance

According to Zimmer Biomet, the impact of COVID-19 is still significant and remains very fluid. Owing to lack of clarity around the scope and duration of the pandemic, the company is still unable to gauge the impact on its overall business in 2020. Accordingly, it did not provide any full-year guidance yet again.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 15.75% due to these changes.

VGM Scores

Currently, Zimmer has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Zimmer has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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