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Here's Why Investors Should Retain Zimmer Biomet (ZBH) Now

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Zimmer Biomet Holdings, Inc. (ZBH - Free Report) is gaining from an ongoing business recovery from COVID-led pandemic impact. The company’s first-quarter 2022 revenues beat the Zacks Consensus Estimate. The recently-completed spin-off of the non-core Dental and Spine business seems strategic. However, consistent pricing pressure and rising costs do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock has declined 30.6% compared with a 26% fall of the industry and a 3.6% drop of the S&P 500.

The renowned musculoskeletal healthcare company has a market capitalization of $24.13 billion. The company’s long-term projected growth of 6.2% compares with the industry’s growth projection of 16.4% and the S&P 500’s expectation of 10.8% growth.

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Image Source: Zacks Investment Research

Let’s delve deeper.

Factors At Play

Q1 Upsides: Zimmer Biomet posted better-than-expected revenues in the first quarter. The company’s geographic segments and product divisions recorded robust year-over-year sales growth at CER. Revenues were driven by stronger and faster-than-expected recovery from COVID-led disruption across most of the markets. U.S. sales rose 5.8%, driven by strong recovery as COVID-19 cases subsided and elective procedures returned. By the end of the quarter, U.S. cancellation rates returned to pre-pandemic levels and procedure volumes were above 2019.

A raised 2022 guidance reflects the improving trend to continue for the rest of the year.

Dental and Spine Spin-Off to Bode Well: Zimmer Biomet recently completed its planned spin-off procedure of the Dental & Spine arm. This planned spin-off is part of the company’s third phase of ongoing transformation, which includes changing the complexion of the business through active portfolio management to accelerate growth and drive value creation.

The company earlier noted that its combined Spine, Dental and bone healing business had a gross margin profile that is slightly below the overall company average. The spin-off is also going to improve the company’s average.

Focus on Emerging Markets to Drive Growth: In the recent past, Zimmer Biomet has been working to strengthen its foothold in emerging markets that provide long-term opportunities for growth. The company's strategic investments in these regions in the past several quarters to improve operational and sales performance yield results.

For orthopedic implants, the markets opportunity is expected to grow to $66.6 billion by 2025 globally. Within this emerging market, we note that strength in the Asia Pacific market has continued to drive strong revenue growth so far. Post the COVID-19 mayhem, Zimmer Biomet is expected to continue with this trend, banking on a cadence of product launches and strong customer adoption.


Escalating Costs: During the first quarter, Zimmer Biomet’s selling, general and administrative expenses were up 4.2%, whereas research and development expenses rose 19.6% year over year, respectively. These mounting operating expenses led to 359 basis points contraction in adjusted operating margin, building pressure on the bottom line.

Pricing Pressure Persists: Pricing continues to remain a major headwind for Zimmer Biomet. The company's top-line growth in the first 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.

Competitive Landscape: Zimmer Biomet faces intense competition from large MedTech stalwarts in the orthopedic industry. The company needs to constantly introduce or acquire new products to withstand the competitive pressure and maintain its market share.

Estimate Trend

Zimmer Biomet has been witnessing a positive estimate revision trend for 2022. In the past 30 days, the Zacks Consensus Estimate for its 2022 earnings has moved 2.9% north to $6.73.

The Zacks Consensus Estimate for 2022 revenues is pegged at $6.81 billion, suggesting a 13.1% fall from the 2021 reported number.

Key Picks

A few better-ranked stocks in the broader medical space are AMN Healthcare Services, Inc. (AMN - Free Report) , Medpace Holdings, Inc. (MEDP - Free Report) and UnitedHealth Group Incorporated (UNH - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 0.8% versus the industry’s 62.8% fall.

Medpace has a historical growth rate of 27.3%. Medpace’s earnings surpassed estimates in the trailing four quarters, the average surprise being 17.1%. It currently has a Zacks Rank #2 (Buy).

Medpace has outperformed its industry in the past year. MEDP has declined 13.4% against the industry’s 62.8% fall.

UnitedHealth has an estimated long-term growth rate of 14.8%. UnitedHealth’s earnings surpassed estimates in the trailing four quarters, the average surprise being 3.7%. It currently carries a Zacks Rank #2.

UnitedHealth has outperformed the industry over the past year. UNH has gained 19.2% compared with 17% industry growth in the said period.