Zimmer Biomet Delivers An Encouraging Bounce-Back In Q4

Baird’s Jeff D. Johnson believes the Q4 results announced by Zimmer Biomet Holdings Inc ZBH represented “a good bounce-back quarter as management made good progress on 3Q supply constraints and seems to have a handle on FDA/Form 483 issues.”

The analyst maintains an Outperform rating on the company, while raising the price target from $130 to $136.

Robust Q4 Results

Johnson believes the improvements seen in Q4 were likely to help product availability ramp over the next couple of quarters, which in turn would help growth in company-wide revenue and EPS over time to recover.

“Such growth, combined with ZBH's 4-5 point valuation discount to large-cap medtech peers, keeps risk/reward looking favorable, in our view,” the analyst mentioned.

The analyst estimates that the broader orthopedic market growth improved 100 bps is Q4:16 to about 4 percent, while Zimmer Biomet’s company-wide organic growth improved almost 200 bps sequentially to 3.5 percent, “as moderating supply constraints, better end markets, and a $10 million international tender win all contributed.”

Guidance

For 2017, management guided to accelerating organic growth of 2.5–3.5 percent, including in-line to above market growth of 3.0–4.5 percent in H2:17.

In addition to improving top-line trends in H2:17, Johnson believes ongoing deal-related cost synergies could help Zimmer Biomet drive improvement in operating margin trends in 2017, driving EPS growth back to the mid-/upper-single-digits later in the year.

“Management issued revenue and EPS guidance for 2017 yesterday of $7,855 million–$7,930 million and $8.50–$8.68, respectively, both of which bracketed Street expectations,” the analyst added.