Goldman Sachs Upgrades Zimmer Holdings to Buy From Neutral (ZMH)

Goldman Sachs is out with a research report this morning, where it upgraded shares of Zimmer Holdings Inc. ZMH to Buy, from Neutral; it has a $75.00 price target on the stock. The GS analysts said, “We upgrade ZMH to Buy from Neutral. Shares are down 7.7% ytd (vs. the S&P 500 -3.6% and the S&P Healthcare Equipment Index of 0.9%), we think the market is under-estimating Zimmer’s long-term growth potential. We raise our numbers to reflect better demand in the US hip/knee market: 2010- 2013E EPS to $4.24, $4.79, and $5.33 from $4.20, $4.72, and $5.22, respectively. We expect Zimmer to reiterate 2010 guidance on its 2Q2010 earnings call and for the company to generate accelerating FX neutral revenue growth. From a risk/reward perspective, we see limited downside to our $51 bear case (-7%) and 37% potential upside to our $75 bull case.” There are a few key points that underpin GS’s investment thesis: (1) “End-user market growth in hips/knees should remain stable on a global basis. (2) New product launches are gaining traction and should have a positive impact on gross margins throughout 2010. (3) Through 2H2010 and 2011, we think Zimmer will start to generate incremental EBIT leverage, as gross margins improve (due to product mix and higher plant utilization) and SG&A leverage, as the benefits from previous investments are realized. We estimate that 52% of 2010-2013E EPS growth will come from operating leverage. (4) The company should remain focused on returns with a significant portion of free cash flow dedicated to stock buybacks.”