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Zimmer Biomet (ZBH) Recovery Rate Slows Down Amid Pandemic

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Zimmer Biomet Holdings, Inc. (ZBH - Free Report) continues to gain market share in the Asia Pacific, Europe, the Middle East and Africa (EMEA) regions. However, slower recovery amid the emergence of a new strain of coronavirus remains a major concern. The company currently has a Zacks Rank #4 (Sell).

In the past year, Zimmer Biomet has underperformed its industry. The stock has gained 7.7% compared with 11.7% growth of the industry.

EMEA sales grew 80.5% year over year but were down 7.3% from the pre-pandemic sales level of 2019 with continued pressure related to the pandemic being a major factor. The company is also concerned about the fact that the Asia Pacific business, which was largely stable in recent times, got impacted late in the second quarter by channel inventory contraction in knee and hip categories within China.

In addition, the company saw a resurgence and increase in COVID-19 in a number of markets, including Japan. While Zimmer Biomet is seeing sequential improvement in the recovery of procedural volumes in large joints, getting back to normalized market growth is taking longer than expected.

The company’s leveraged capital structure is an added concern. In the reported quarter, total debt was much higher than the corresponding cash and cash equivalent level, indicating a tough solvency position. The company’s near-termpayable debt too was higher than the present level of cash in hand. This is a matter of concern for investors as during the period of global economic uncertainties, its cash and cash equivalent was not sufficient even for short-term debt repayment.

Further, pricing continues to remain a major headwind for Zimmer Biomet.

On a positive note, Zimmer Biomet ended the second quarter of 2021 with better-than-expected revenues and earnings. Year-over-year earnings and constant currency revenue growth were extremely robust. Sales improved across all its operating segments and geographies as recovery from the pandemic continued through the months of the second quarter.

Despite some ongoing COVID-19 pressure, the company expects continued improvement in procedure volume recovery through the second half of 2021. Strong demand and favorable customer feedback continued for Avenir Complete hip. New products and better commercial execution drove growth in the quarter with strong contributions from implants and digital solutions within the dental business.
 
When compared to the second quarter of 2019, net sales were flat at CER. Overall, consolidated and regional results were slightly better than expectations in the Americas and Asia Pacific. There was sequential improvement in EMEA in the reported quarter. Strong margin expansion was another upside.

Moreover, Zimmer Biomet’s spin-off decision of the non-core dental and spine business is expected to prove strategic.

Key Picks

A few better-ranked stocks from the broader medical space are Envista Holdings Corporation (NVST - Free Report) , Hill-Rom Holdings, Inc. (HRC - Free Report) and Henry Schein, Inc. (HSIC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.

Envista has a projected long-term earnings growth rate of 27%.

Hill-Rom Holdings has a projected long-term earnings growth rate of 8%.

Henry Schein has an estimated long-term earnings growth rate of 14%.