Zimmer Holdings Earnings Preview

| About: Zimmer Biomet (ZBH)

Zimmer Holdings (ZMH) is scheduled to release first quarter fiscal 2011 earnings on Thursday, April 28, before the market opens.

The company is expected to earn $1.12 per share on revenues of $1,093 million for the quarter, according to the Zacks Consensus Estimate.

Previous Quarter Highlights

Zimmer Holdings reported EPS of 18 cents during the fourth quarter of fiscal 2010, 76% lower than 74 cents in the year-ago quarter. However, after considering certain adjustments, the EPS was $1.27, surpassing the Zacks Consensus Estimate of $1.19 and $1.12 in the fourth quarter of fiscal 2009. The company recorded goodwill impairment charges ($204 million or $1.03 per share) related to its U.S. Spine business during the quarter.

Zimmer reported revenues of $1,134.7 million during the quarter, 2% higher than the year-ago period and above the Zacks Consensus Estimate of $1,107 million.

Zimmer’s Reconstructive Implant recorded a 1% increase in revenue to $856 million, driven by growth in Asia Pacific (9%) and Americas (3%), partially offset by a 4% decline in sales from Europe. Barring Spine Products (5% decline to $60 million); growth was witnessed across almost all other business segments including Surgical and Other (8% annually to $87 million), Trauma (9% to $69 million) and Dental (10% to $63 million).

Zimmer also provided its outlook for 2011. The company expects to report adjusted EPS of $4.60 to $4.80 (reported basis: $4.25-$4.45) on revenue growth of 2%-4% at constant exchange rates. Currency movement is expected to have a favorable impact of 1% on revenues. In order to streamline its business, Zimmer plans to continue with its global restructuring program. Savings from these initiatives will enable the company to invest in new products and technologies and generate growth.

Agreement of Analysts

Estimate revision trends among the analysts have moved in both directions. Over the last 30 days, three analysts lowered their estimates for the first quarter with two moving in the opposite direction. While no upward revision has taken place for fiscal 2011, two analysts lowered their estimates.

The Asia Pacific segment accounted for $689.1 million, or 16%, of sales in 2010, with Japan being the largest market within this segment, accounting for approximately 55% of the region’s sales. As a result, the recent earthquake and devastating tsunami in this region is likely to affect revenues.

The extent of the impact on the company’s revenue stream will become more clear following the results. This is one of the primary reasons behind the downward revision in estimates by the analysts, especially because orthopedic implants are often elective in nature.

Zimmer faced several headwinds during 2010, such as a slowdown in procedure volume, pricing erosion and weakness in the reconstructive business. However, the company has witnessed some stability in procedure volume and expects further recovery as the economy strengthens. We expect further clarity regarding these aspects at the call.

While Zimmer continues to face pricing pressure in the fourth quarter, the situation improved a bit relative to the third quarter and remained stable. During 2010, the company witnessed a 1% decline in pricing, which was at the lower end of its expectation at the beginning of the year.

The decline in prices comprised -1.2% in the Americas (1.6% in the third quarter), -0.6% in Europe (flat in the third quarter) and -3.4% in Asia Pacific (-2.9%). Zimmer expects price compression within the Reconstructive segment to continue and for the company it should remain in the range of -1% to -2% in 2011. We expect an update from the company regarding the pricing scenario.

Magnitude of Estimate Revisions

The magnitude of revisions is insignificant following fourth quarter results. Overall, estimates for the first quarter have gone down by a penny to the current level of $1.12 in the last 30 days. For fiscal 2011, estimates were pushed up by 5 cents to the current level of $4.70 and remained consistent in the last 30 days.


Going by past trends, we expect Zimmer to surpass estimates since it has exceeded expectations in the past four consecutive quarters. The company has a positive four-quarter average of 3.14%.

Our Recommendation

Zimmer offers a broad line of reconstructive implant and trauma products, as well as orthopedic surgical instruments and supplies. We believe that the company is on its growth trajectory through new product launches, employment of new technologies and expansion into emerging markets.

However, Zimmer continues to witness challenges in the form of pricing pressure and lower procedure volumes resulting from economic uncertainty. Moreover, the company faces tough competition from players such as Smith & Nephew (NYSE:SNN) and Johnson & Johnson (NYSE:JNJ) among others.

We have a ‘Neutral’ recommendation on the stock, which also corresponds to the Zacks #3 Rank ('hold') in the short term.

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Tagged: , Medical Appliances & Equipment, Earnings
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