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Zimmer Biomet Faces Procedure Delays, Long-Term Potential Solid

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On May 28, we issued an updated research report on Zimmer Biomet Holdings, Inc. (ZBH - Free Report) . The company continues to witness strength in the Asia Pacific (APAC), Europe, the Middle East and Africa (EMEA) regions. However, pricing continues to be a major concern. The stock currently has a Zacks Rank #3 (Hold).

Over the past six months, Zimmer Biomet underperformed its industry. The stock has declined 11.7% compared with 5.4% drop of the industry. Zimmer Biomet ended the first quarter on a dismal note with disappointing sales performances across all operating segments and geographies. The company noted that first-quarter performance was negatively impacted by COVID-19, which reached a pandemic level in March and resulted in a significant and sudden decline in elective procedure volumes across all regions.

Zimmer Biomet expects the decline in elective procedure volumes to intensify in the second quarter of 2020. Given the uncertainty related to the scope and duration of the pandemic and its ongoing impact on the deferral of elective procedures, the company is currently unable to gauge the expected impact on its overall business in 2020. Accordingly, it did not provide any update on its full-year guidance.

According to Zimmer Biomet, COVID-19 will continue to have a significant unfavorable impact in the near term. The deferral of elective procedures as a result of hospitals redeploying resources to COVID-19 is expected to have a meaningful negative impact through the company’s 2020 performance. Zimmer Biomet noted that this impact became pronounced in mid- to late March. That trend extended into the first part of the second quarter. April revenues were down about 70% year over year with the pandemic intensifying in submarkets.

Asia Pacific business decreased 9.5% in the first quarter as the company began to see procedure deferrals in early February at varying levels across the region and at varying times during the quarter. While China experienced some deep declines, Japan, Zimmer Biomet’s largest market in Asia Pacific, did not see a material impact from COVID-19 in the first quarter. However, there has been a modest decline in procedures in April since the country announced the state of emergency. In April, procedures and revenues in Japan were down about 15% and have been stable at that level since then. Across EMEA, in April, the company saw procedure or revenue decline of about 75% versus the prior year. In Americas, through April, Zimmer Biomet continued to see a decline in procedures with deferral rates of about 75% to 85% and revenue decline of about 80% from the prior year.

However, Zimmer Biomet expects its strong fundamentals and capital structure to position it well to overcome the ongoing challenges.

The company should benefit from favorable long-term trends including sustained growth driven by obesity, wear and tear of joints from more active lifestyles, growth in emerging markets, new material technologies, advances in surgical techniques and proven clinical benefits of joint replacement procedures.

More importantly, the percentage of population over the age of 65 in the United States, Europe, Japan and other regions is expected to nearly double by the year 2030. We believe Zimmer Biomet to continue to benefit from this aging demography since knee and hip joints tend to wear out with age and therefore require replacement.

Strong solvency and capital structure are positives.

Key Picks

Some better-ranked stocks from the broader medical space are Aphria Inc. , Surmodics, Inc. (SRDX - Free Report) and Owens Minor, Inc. (OMI - Free Report) .

Aphria’s long-term earnings growth rate is estimated at 24.6%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Surmodics’ long-term earnings growth rate is projected at 10%. The company presently sports a Zacks Rank #1.

Owens Minor’s long-term earnings growth rate is estimated at 8.3%. It currently carries a Zacks Rank #2.

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