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Zimmer (ZBH) Non-Core Arm Spinoff to Aid Amid COVID-19 Crisis

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On Feb 11, we issued an updated research report on Zimmer Biomet Holdings, Inc. (ZBH - Free Report) . The company continues to gain market share in the Asia Pacific (APAC), Europe, the Middle East and Africa (EMEA) regions. However, adverse pricing and deferral of procedure volume amid the pandemic continue to be major concerns. The stock currently has a Zacks Rank #3 (Hold).

Over the past three months, Zimmer Biomet has underperformed its industry. The stock has gained 6.5% compared with 8.6% rise of the industry.

Zimmer Biomet ended the fourth quarter of 2020 with year-over-year decline in sales across most of its operating segments and geographies. The company noted that continued pressure from the COVID-19 pandemic slowed down the recovery of elective procedures in the fourth quarter. According to Zimmer Biomet, COVID-19, remained a challenge in the fourth quarter with significant surge in new cases. Even in first-quarter 2021 so far, while Europe, Middle East, and Africa (EMEA) is seeing lockdown measures to a far lesser extent, it is still impacting Asia Pacific. In the Americas too, there is increased pressure on the business as a result of a surge in infection.

According to Zimmer Biomet, the impact of COVID-19 is still significant and remains fluid. Owing to the lack of clarity around the scope and duration of the pandemic, the company is still unable to gauge the impact on its overall business. Accordingly, it did not provide any guidance for 2021.

Further, the company's top-line growth in the reported quarter was partially offset by continued pricing pressure, mostly in the Americas and Europe operating segments. We remain concerned about the pricing scenario as it will be affected by cost-containment efforts by governmental healthcare, local hospitals and health systems. In 2020, pricing pressure was negative 2.4%.

On a positive note,despite the near-term pressure, Zimmer Biomet is confident about market recovery in 2021. Further, the longer-term financial profile of the company is driving continued investment into priority areas of the business. The company currently expects adjusted gross margin to stabilize in 2021, with quarterly margin levels broadly in line with what it saw in the back half of 2020.  

Also, we look forward to the company’s planned spin-off of its Spine and Dental business, which is part of the company’s third phase of transformation, which includes changing the complexion of the business through active portfolio management in order to accelerate growth and drive value creation.

The company is also performing well in its priority areas like quality remediation, supply recovery efforts and product introductions. With respect to quality remediation, it made good progress in the fourth quarter.

Of late, Zimmer Biomet has been solidifying its foothold in the emerging markets offering long-term opportunities. The company’s strategic investments in these zones over the last several quarters to improve its operational and sales performance are yielding results. It expects consistent growth in the APAC and EMEA markets this year.

Key Picks

Some better-ranked stocks from the broader medical space are Align Technology (ALGN - Free Report) , Hologic (HOLX - Free Report) and Abbott Laboratories (ABT - Free Report) . While Align Technology and Hologic each currently sport a Zacks Rank#1 (Strong Buy), Abbott  presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has a projected long-term earnings growth rate of 19.8%.

Hologic has a projected long-term earnings growth rate of 15.4%.

Abbott has an estimated long-term earnings growth rate of 14.6%.

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