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Zimmer Holdings’ (NYSE:ZMH) Q1 net rose to $233.4 million, or 98 cents a share, from $205.6 million, or 82 cents a share, a year earlier on 10% higher sales. The Warsaw, Ind., maker of reconstructive and spinal implants, trauma and related surgical products revenue rose to $950.2 million from $860.4 million a year ago. For the year, Zimmer boosted its adjusted earnings view to $4.02 a share from $3.95.

We are reiterating out buy rating on the orthopedic juggernaut, for reasons listed below. We believe the attractive coupling of Baby Boomer lifestyle trends and favorable product and volume mix will position Zimmer for an unforgettable FY2007. Not surprisingly, management raised 2007 guidance after the close Wednesday & expects well over $4/share for full year EPS. Notably, Zimmer continued its buyback process, picking up another 2.1M shares out of the public hands over the last 3 months.

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Zimmer Sales Get a Jolt, thanks to improved product offerings

Our estimates are significantly higher & are fervently ratcheting up our price target to $105, based on sustainable 33% EBIT margins for another 4-6 quarters. Below is a quick hit list concerning some of the underlying drivers for Zimmer’s growth.

• Rampant obesity, increasingly active Boomers, and hip degeneration procedures are creating the “perfect storm” for Zimmer, which controls roughly 80% of the reconstructive implant market. 54% of Zimmer’s sales come from knee and hip replacements. Its newest NextGen and GenderSolutions knees for women (80% of osteoarthritis victims are females) are as a hot as a pistol, which has contributed to Zimmer’s improving margin profile.

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• Zimmer has pared down debt, bought back stock, and driven ROE to 17%+ levels; management is attuned to “getting the job done” and is enthused about its gender specific knees, due out in 2008.

• Recent staleness in the large pharmaceutical space, as well as saturation in the stent circles – leads us to believe that Zimmer is a compelling way to the play the Heath Care sector: At less than 30x EPS, Zimmer has room to trade up to a 2.0 PEG and would gladly go long the common on pullbacks. We think there is still as much as 15% upside for Zimmer before multiples began to contract and large cap growth PMs would be wise to scoop up shares opportunistically.

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• Zimmer, with its low debt levels and market potential (by 2030, there will be 70M Americans over the age of 65), has recently made the “potential LBO” rounds. Zimmer’s $20B market cap, $1B+ in 2006 operating cash flow, and free cash flow generation are attractive features for any potential buyer.

Disclosure: Dan Jacome is an MBA Candidate at Indiana University, as well as founder, Ceviche Fund Partners LP. He was not long Zimmer at the time of publication.

Source: Bad to the Bone: Zimmer Smokes EPS, Thesis Intact