Zimmer Holdings, Inc. (ZMH) is operating in medical device industry; the global medical device industry is recession-resilient and profitable. Despite the downturn in the last few years, this industry has continued to earn positive profits and has experienced considerable growth over the last five years. More than 43% of US medical devices companies reported that their sales increased by 10% or more in 2012. This growth is expected to continue in the next few years (i.e., from 2013 to 2017) with a CAGR of 6.1%, and it will reach approximately $302 billion in 2017.
The factors that contribute to this growth in America are the expansion of coverage by the Patient Protection and Affordable Care Act and the increasing age of American citizens-there are now more senior citizens in the country than ever before. Meanwhile, in the Asia-Pacific region, sales are escalating because of increasing purchasing power parity and rising government investment in the healthcare sector.
The medical device industry is quite diversified; it ranges from toothbrushes to implantable pacemakers. The charts represent the major market segmentation in the industry and major product segmentation by revenues, respectively.
Major Market Segmentation
Major Product Segmentation by Revenues
The barriers to enter into the industry are low to moderate; therefore, high rivalry prevails. The key players of the industry are Medtronic Inc. (NYSE:MDT), St. Jude Medical (NYSE:STJ), and General Electric (NYSE:GE), which controls 31.9% of total market share. Despite of the presence of these industry giants, Zimmer Holdings Inc. has been successful in securing its share of the market. The charts exhibit that its chief market is America, while it has a market share in the European and Asian-Pacific markets as well.
The categories which the company serves are reconstructive, dental, trauma, spine, surgical and others. It generates its highest sales from the reconstructive segment, which includes the categories of knees, hips and extremities.
Source: Company Financials
Financial Performance Analysis
The table displays the company's revenues for the last three years in all the regional segments in which it operates. The highest revenues come from America, while the lowest revenues come from the Asia-Pacific region.
Zimmer Holdings Inc.'s revenues are increasing at a declining rate. Revenue growth rates have declined due to the lower average selling prices in 2012 compared to 2011, and because of changes in foreign currency exchange rates. Its profit, income and operating margins are the same compared to previous years, which shows that an increase in expenses is in synchronization with the increase in revenues.
The company's net income growth is far less than the industry average, but its operating margin is above the industry, showing that the company is better able to pay its fixed costs than the industry. Its net margin is also above the industry, revealing that despite the low revenue and net income growth, it earns higher profits than its competitors and has better control over its costs. It also earns higher returns on its assets and equity compared to its peers.
Zimmer Holdings' Relative Growth
The chart shows the revenue performance of Zimmer Holdings, Boston Scientific (NYSE:BSX), St. Jude Medical and Stryker Corporation (NYSE:SYK). All the organizations are demonstrating low revenue growth in the first quarter of 2013 because of the imposition of a 2.3 percent excise tax on the sale of medical devices starting this year. The tax is projected to generate $29.5 billion in revenue for the federal government over the next decade. This tax will have a negative impact on the industry such that innovation in the industry will decline, jobs will be cut and fewer devices will be developed for patients in need of treatment.
However, the revenue growth of Zimmer Holdings is considerably higher than two of its peers, while a little below that of Stryker Corporation.
The table depicts a distinction between ZMH's valuation and that of its competitors. The company's price-to-sales ratio is greater than the industry, but its price-to-book and price-to-earnings ratios are lower than the industry, demonstrating that the stock is slightly undervalued compared the overall industry, and the investors have a viable opportunity as the company has growth prospects in the future.
In a recent survey conducted in the medical devices sector, more than 60% of the respondents from America, Europe, the Middle East, Africa and Asia-Pacific said that the overall business environment for the medical device industry is positive. This shows that there is an opportunity for the company to grow and earn higher profits.
It is projected that the industry's revenues will grow at CAGR of 6.1% from 2013 to 2017. Based on this assumption, the company's revenues are forecasted. The gross profit, operating profit and net income are forecasted presuming the constant margins of FY12. Through this table, it is evident that the revenues will continue growing in next five years.
The performance of Zimmer Holdings is quite satisfactory, as it has a net margin which is above the industry average. It is anticipated to earn good profits in the future as well. The additional benefit for the investors is that the company operates in an industry which is somewhat recession-proof, so any negative change in the global economy will not affect it severely. Therefore, it provides an attractive investment opportunity and I recommend for investors to buy this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.