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Zimmer Holdings, Reliable Growth

|Includes:MDT, SYK, Zimmer Biomet Holdings, Inc. (ZBH)

Zimmer Holdings is a medical technology company that focuses on designing and manufacturing surgical implants. Of their roster of dental, trauma, spinal and other surgical products, approximately 74% of sales originate from knee and hip implants. They have operations in over 25 countries and sell to over 100 countries with 55% of revenue coming from North America and 26% from Europe, the remainder is from Asia. What makes this company particularly special is its focus on orthopedic s versus its competitors who have more diversified medical products.

Not Just for the Elderly

Hip and knee reconstruction is on the rise due to patients who desire to continue strenuous athletic activities. The population is not only looking to relieve pain, but also to ensure their bodies can handle joint taxing motions. In addition, the population of young patients (40-60 years old) who suffer from end-stage arthritis is growing thus resulting in patients that are choosing to opt for surgery rather than miss out on work1.

Dupont Analysis

9 Months Ended 2012

ROE

Net Income

Pretax Income

EBIT

Sales

Assets

10.265

602.2

803.6

846.9

3291.2

9012.4

 

Pretax Income

EBIT

Sales

Assets

Equity

 

803.6

846.9

3291.2

9012.4

5866.3

 

Tax Burden

Interest Burden

Operating Income Margin

Asset Turnover

Leverage Ratio

 

0.7494

0.9489

0.2573

0.3652

1.5363

9 Months Ended 2013

ROE

Net Income

Pretax Income

EBIT

Sales

Assets

8.554

525.1

678.1

720.3

3382.7

9357.4

 

Pretax Income

EBIT

Sales

Assets

Equity

 

678.1

720.3

3382.7

9357.4

6139

 

Tax Burden

Interest Burden

Operating Income Margin

Asset Turnover

Leverage Ratio

 

0.7744

0.9414

0.2129

0.3615

1.5243

Click to enlarge

After a quick Dupont analysis, it is evident that EBIT has been lowering the return on equity. Looking at the 10-Q the company has addressed this due to global restructuring, quality and operational excellence initiatives, certain litigation and recent acquisitions with a heavier emphasis on operations. We will be looking to see positive future effects these expenses in future fiscal periods.

Strengthening Hold on Orthopedics

Zimmer has released several new products in the past few years and have developed a strong hold of the surgical replacement market. They have taken a forward approach into releasing new products that are both synergistic (small musculoskeletal implants) and improvements of current technology. This particular industry does not contain revolutionary discoveries however, instead there will be a constant evolution in product development. Zimmer's 2013 release such as the Persona, a personalized knee system and Trabecular Metal Total Ankle build on the evolution of knee and ankle treatments.

In addition, the greatest moat in this industry stems from the surgeon's preference, and learning curve for a particular product. A surgeon would prefer to work with a specific product that they are familiar with versus learning how to implant a different product.

Bottom Line

Zimmer is a recommended long due to mainly the increasing trends in joint replacements and population. In addition, Zimmer is consistently exhibiting growth within the orthopedic industry by acquiring companies and consistently releasing new products. Its branding will continue to strengthen which is important in order to capture the loyalty of surgical professionals.

1http://www.amjorthopedics.com/index.php?id=25336&cHash=071010&tx_ttnews[tt_news]=203698

Stocks: ZBH, SYK, MDT