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Zimmer Remains Neutral

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We recently reiterated our Neutral recommendation on leading orthopedic medical devices company Zimmer Holdings . We are positive on the gradually stabilizing global musculoskeletal market, better volume environment, several restructuring initiatives and diversion of savings for further investment. Yet, at the same time, we are concerned about the pricing scenario as it is likely to be affected by the cost-containment efforts undertaken by governmental healthcare, local hospitals and health systems.

Why Neutral?

Zimmer’s third-quarter 2013 adjusted EPS of $1.25 surpassed the Zacks Consensus Estimate by a penny and the year-ago number by 8.7%. Revenues amounted to $1,074 million, up 6.7% at CER and ahead of the $1,063 million mark. 

The outperformance came on the back of gradual stability in the global musculoskeletal market with decent sales growth in certain geographic regions. This growth was also accompanied by new product launches, contributions from new product categories recently ventured into, and the focused execution of the company’s global sales teams. With its expectation of markets to stabilize further, Zimmer is confident about its differentiated portfolio that comprises both premium and value-based offerings.

Moreover, higher volumes of new products and manufacturing process improvements were major positives.During the reported quarter, increased volume and changes in product mix contributed 9.1 and 4.3 percentage points of year-over-year knee and hip sales growth, respectively. In addition, volume trend in the reconstructive market is expected to improve, with procedural deferrals diminishing over time.

Meanwhile, Zimmer is on its way to achieve market growth based on its strong product portfolio and aging demographics. In order to streamline its business, it plans to continue with its global restructuring program.

However, pricing pressure continues to remain a major headwind for the company. In the reported quarter, currency impacted 1.9% (equal to $ 20 million) of revenues.The negative currency impact from the Japanese yen and the Australian dollar denominated revenues was partially offset by the favorable currency impact of the company’s Euro denominated revenues.

Other Stocks to Consider

While we prefer to remain on the sidelines regarding Zimmer, other medical device stocks worth a look are Align Technologies Inc., (ALGN - Free Report) , Cardinal Health, Inc. (CAH - Free Report) and Mindray Medical International Limited . All these stocks carry a Zacks Rank #1 (Strong Buy).

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