Zimmer Holdings: Earnings Preview

| About: Zimmer Biomet (ZBH)
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Zimmer Holdings (ZMH) is scheduled to release its second quarter of fiscal 2011 earnings on Wednesday, July 27, 2011 before the market opens.

The company is expected to earn $1.19 per share on revenue of $1,129 million for the quarter, according to the Zacks Consensus Estimate.

Previous Quarter Highlights

Zimmer Holdings reported an EPS of $1.08 during the first quarter of fiscal 2011, compared with $1.01 in the year-ago quarter. However, after considering certain adjustments, the EPS was $1.19, surpassing the Zacks Consensus Estimate of $1.12 and $1.02 in the first quarter of fiscal 2010. Revenue increased 5% year over year (3.3% at constant exchange rates, CER) to $1,116 million during the quarter, beating the Zacks Consensus Estimate of $1,093 million.

Zimmer’s biggest segment, Reconstructive Implant, recorded a 3% increase in revenue to $842 million driven by growth in Asia Pacific (16%), Europe (3%) and Americas (1%). While revenue from Knees (within Reconstructive) remained unchanged at $462 million, Hips and Extremities recorded growth of 7% to $337 million and 12% to $43 million, respectively. Among the other segments at Zimmer, barring Spine which declined 5% to $57 million, growth was witnessed across all other businesses including Surgical and Other (10% annually to $84 million), Trauma (16% to $70 million) and Dental (21% to $63 million).

Zimmer reiterated its outlook for 2011 during the first quarter earning release. The company expects to report adjusted EPS of $4.60–$4.80 (reported basis: $4.25–$4.45) on revenue growth of 2%–4% at CER. Currency movement is expected to boost revenues by 3% thereby giving way to reported revenue growth of 5%–7%.

Agreement of Analysts

Estimate revision trends over the last 30 days were insignificant. While 2 analysts raised their estimates for the second quarter, only 1 moved in the opposite direction. Over the last 7 days, 1 analyst lowered the estimate for the quarter with none moving in the opposite direction.

Pricing pressure continues to be a major concern for Zimmer. The company expects price compression within the Reconstructive segment to continue. For the company at large, price compression is expected to come between -1% and -2% in 2011, following the completion of one year of negative pricing in Japan at first quarter end.

Procedure volumes in the musculoskeletal market during the first quarter were stable relative to the fourth quarter but were lower than the normal level of growth. However, Zimmer expects the growth rate of procedure volume in the US to recover in the second half of 2011. The company is expected to provide an update regarding the pricing and volume scenario.

Zimmer has been investing in its product portfolio over the last few quarters. As a result several new products launched over the past few months have had a positive impact on the product mix.

Magnitude of Estimate Revisions

The magnitude of revisions is insignificant over the past 30 days. Overall, estimates for the second quarter remained unchanged at $1.19 in the last 30 and 7 days.


Going by past trends, we expect Zimmer to surpass estimates since it has exceeded expectations in the past four consecutive quarters with a four-quarter positive average surprise of 4.22%. This means that the company has exceeded estimates by this magnitude.

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 the 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), 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.