The Rising Influence of Rising Affluence

[DewDiligence]

Barron’s Roundtable participant, Scott Black, likes ZBH:

http://www.barrons.com/articles/2017-roundtable-part-2-manual-for-a-mixed-up-market-1484976857

Scott Black: Zimmer Biomet Holdings (ZBH) makes orthopedic products. It has been hurt by concerns about rising health-care prices, but in this case, the baby might have been thrown out with the bathwater. Zimmer reported disappointing earnings in the latest quarter. The stock is down 21%, to $105, from last year’s high.

Unlike drug companies, which have been raising average selling prices by 8% to 10% a year, Zimmer’s prices have declined by 1% to 3% in the past two years. It can’t be accused of price-gouging.

Management is committed to 10% earnings growth. We expect revenue to grow about 4% this year, to $7.94 billion. The company could earn about $8.70 a share.

Zimmer bought Biomet in 2015. It has promised $350 million in savings and has already achieved $225 million.

Zimmer is reducing its interest expense, as it has been paying off debt. It has already repaid more than $1 billion in debt from the Biomet merger. In the first nine months of 2016, Zimmer had $910 million of free cash flow and $972 million of non-GAAP income. Return on equity is about 16.3%. The P/E ratio on 2017 earnings is 12.1.

Barrons: How does that compare with the industry?

Black: Competitors such as Stryker (SYK) and Medtronic (MDT) have substantially higher multiples.

In knee products, Zimmer has 36% of the market worldwide. In hips, it has 30%. In sports, extremities, and trauma, or SET, it has 11%. In spine products, including thoracic, it has roughly 14%, due to the Biomet acquisition.

Demographics are working in its favor. Typically, patients who need joint surgery are 65 and older. The world’s 65-and-over population was 7.6% of the total in 2010. By 2020, it will be 9.3%.

Joint-related medical procedures are growing by 2% a year in the U.S. Zimmer generates 63% of revenue in the U.S., 23% in Europe, and 14% in Asia/Pacific. It is losing money in its dental business, but has vowed to turn it around.