We recently reiterated our Neutral recommendation on leading orthopedic medical devices company Zimmer Holdings (ZMH). While we hold a favorable view regarding the company’s gradually improving volume trend, several restructuring initiatives and diversion of savings for further investment, we remain concerned about the pricing scenario as it will be affected by the cost-containment efforts by governmental healthcare, local hospitals and health systems.
Why Neutral?
Zimmer’s first quarter 2013 adjusted EPS of $1.41 was ahead of the Zacks Consensus Estimate by 1 cent and up 8.5% year over year. Revenues were $1,139 million, up 1% at CER and below the Zacks Consensus Estimate of $1,143 million.
During the reported quarter, higher volume and changes in product mix contributed 2.2 and 0.5 percentage points of year-over-year knee and hip sales growth, respectively. Moreover, volume trend in the reconstructive market is expected to improve, with procedural deferrals diminishing with time.We are also encouraged to note improving sales in the emerging markets like Asia-Pacific, which offers significant growth opportunities for the company’s reconstructive business.
Meanwhile, Zimmer is on its way to achieve market growth based on its strong product portfolio and aging demographics. In order to streamline its business, Zimmer plans to continue with its global restructuring program.
However, pricing pressure continues to remain a major headwind for the company. Moreover, during the reported quarter, currency had a negative impact of 1.2% or $13 millionon revenues.
Positive currency impact from the Japanese Yen and the Chinese RMB-denominated revenues was offset by the unfavorable currency impact from the company’s Euro denominated revenues. Zimmer updated its growth outlook for 2013 as currency movement is now expected to lower revenues by 1.5% resulting in 1% to 3% revenue growth on a reported basis.
Other Stocks to Consider
While we prefer to remain on the sidelines on Zimmer, other medical device stocks worth a look are Myriad Genetics Inc. (MYGN), Natus Medical Inc. (BABY) and Haemonetics Corporation (HAE). All these stocks carry a Zacks Rank #1 (Strong Buy).
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