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Zimmer Stays at Neutral

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We recently reiterated our Neutral recommendation on Zimmer Holdings , a leading orthopedic medical devices company. While we hold a favorable view regarding the company’s gradually improving volume trend, several restructuring initiatives and diversion of savings for further investment, we remain concerned about the pricing scenario as it will be affected by the cost containment efforts by governmental healthcare, local hospitals and health systems.

Why at Neutral?

Zimmer’s fourth-quarter adjusted earnings per share (EPS) of $1.51 was ahead of the Zacks Consensus Estimate by a couple of cents and the year-ago earnings of $1.36.  Revenues were $1.18 billion, up 2.1% at CER and ahead of the Zacks Consensus Estimate of $1.175 billion.

Pricing pressure continues to remain a major headwind for the company. The company experienced (1.9%) of pricing pressure in the reported quarter. Based on recent trends, pricing for 2013 is likely to remain at (2%). In the reported quarter, large joint reconstructive pricing in the U.S. improved roughly 50 basis points, offset by incremental pressure in certain key European markets as anticipated. Moreover, currency headwinds in 2013 are expected to reduce revenues by 0.5%.

However, we are encouraged to note improving sales in the emerging markets like Asia-Pacific, which offers significant growth opportunities for the company’s reconstructive business. 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, Zimmer plans to continue with its global restructuring program.

Over the past 7 days, 1 of the 26 firms covering the stock made a positive estimate revision for the current year, while there was no downward revision. This implies that the firms still hold similar views on the stock.

Other Stocks to Consider

While we prefer to remain on the sidelines on Zimmer, other medical device stocks worth a look are Cyberonics Inc. , Acadia Healthcare Company, Inc. (ACHC - Free Report) and ResMed Inc. (RMD - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy).

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