Zimmer Biomet Holdings Inc.

 

Heads and shoulders, knees and toes.  A product of the merger of Zimmer and Biomet, ZBH has become a dominant provider of musculoskeletal solutions.  The company has exhibited slower growth and is experiencing headwinds but they are in process of executing a turnaround to remove capacity constraints.  Quality products and improved execution should lead to growth. 

 

Ests:     3Q19   4Q19   FY19    FY20

Revs    1.87b   2.12b   7.95     8.16

EPS      1.75     2.27     7.82     8.29

 

P=136.53, D/C=39%, Div=.96, yield=0.7%, TTM EPS 7.75, P/E=18X, FY19 P/E=16X

 

3Q19   1.77 vs 1.63 +8.6%, est 1.75 down from 1.91

  • Nov 5, 2019, P=136.53, TTM EPS=7.75, P/E=18X, FY19 P/E=16X

  • Revs +3% to 1.89bn, +3.9% ex fx, adj GM 72.4% vs 71.6%, OM 26.5% vs 25.6%, OpInc +6.4%

  • Ex fx, Americas +2.3%, EMEA +4.8%, AsiaPac +8.8%, average volume +6.8%, Price -2.9%

  • FY19 Guidance affirmed, FCF 424.6m vs 345m, guidance implies 4Q flat to up 6.9%

  • Some GM headwinds in 2020 as higher cost inventory (due to capitalized investments) get consumed plus continued investments for growth.  There will be other tailwinds including mix but headwinds will be stronger. Still expect some operating leverage coupled with some revenue growth.  

  • Solid results, guidance and commentary for 2020 are more tempered than I would have expected.  There’s still opportunity for acceleration in 2021 but at 18X trailing earnings, stock could have limited upside until 2021 is more visible.

2Q19   1.93 vs 1.92, est 1.91

  • July 26, 2019, P=123.91, TTM EPS=7.61, P/E=16X, FY20 P/E=15X

  • Revs -0.9% to 1.99bn, +1.2% ex fx, adj GM 72.5% vs 71.9%, OM 27.4% vs 28%, OpInc -2.9%

  • Ex fx, Americas +0.1%, EMEA +1.9%, AsiaPac +4.7%, average volume +3.9%, price -2.7%

  • FY19 Guidance: Revs flat to up 0.5%, OM 27-27.5%, EPS 7.75-7.90 (slight boost in low end), implies 2H EPS +4-8%

  • CEO confidence increasing, expect to achieve its average market growth rate target in 3Q19 vs 2020 previously expected.

  • While FY19 guidance only slightly boosted at low end, implications for 2020 are likely better.  

1Q19   1.87 vs 1.91 -2.1%, est 1.86 down from 1.95

  • Apr 26, 2019, P=124.73, TTM EPS 7.60, P/E=16X, FY19 P/E=16X

  • Revs -2.1% to 1.98bn, +0.7% ex fx, GM 72.1% vs 72%, OM 26.6% vs 28.3%, OpInc -8.2%

  • Asia Pacific, Europe, Middle East and Africa delivered solid performance, Americas a little soft.  

  • Mgmt encouraged that turnaround is taking hold, recently launched products should benefit 2H

  • FY19 Guidance: Unchanged, acceleration set for 2H and into 2020.

  • Repaid 110m of debt, expect majority of FCF in 2019 for debt repayment.

  • In early launch stage for ROSA, getting solid surgeon feedback but that was expected and incorporated into guidance.

4Q18   2.18 vs +3.8%, est 2.17 down from 2.22, FY18 EPS 7.64 vs 8.03, -4.9%

  • Feb 1, 2019, P=109.57, TTM EPS 7.64, P/E=14X, FY19 P/E=14X

  • Revs +0.1% to 2.07bn, +1.6% ex fx, GM 72.4% vs 72.7%, OM 29.3% vs 31%

  • FCF 259.4m vs 275.4, FY18 FCF 1.3bn vs 1.1bn

  • FY19 Guidance: Revs roughly flat, +/- 0.5% including -1-1.5% fx headwinds, OM 27-28% (vs 27.9%), EPS 7.70-7.90 (midpoint +2%, est 7.82), FCF 1.1-1.3bn, vs 1.3bn due to higher CapEx

  • Guidance looks roughly in line with estimates, turnaround continues to progress decently.  

3Q18   1.63 vs 1.72, -5.2%, est 1.61 down from 1.72

  • October 26, 2018, P=122.15, TTM EPS=7.56, P/E=16X

  • Revs +1.3% to 1.837bn (+2.3% ex fx), GM 71.6% vs 72.9%, OM 25.6% vs 29.8%, OpInc -12.7%

  • Improved organic sales growth validating thesis that business is improving

  • FY 18 Guidance: Unchanged except for slightly lower positive impact from fx and a slightly lower tax rate.  

  • CEO pleased with progress but not yet declaring victory until delivering sustainable revenue growth >2-3% and thinks this is a 2020 event, Robotic surgical system should be launched in 2H19 setting up for 2020 turnaround.  Expect a headwind for several quarters as they terminate a distribution agreement with a bone cement supplier, also expect continued GM pressure in 2019 as elevated production costs continue, cost improvements will appear delays as they won’t get recognized until that inventory sells.  

  • Stock was weak in reaction to results which were a bit better than expected but mgmt. does not expect meaningful improvement until 2020 so some investors likely being impatient or cautious.  It would be tempting to use ZBH to raise cash but it might be cute given the turnaround is getting closer and more probable.  

2Q18 1.92 vs 2.08 , -7.7%, est 1.88

  • July 27, 2018 P=117.11, TTM EPS=7.65, P/E=15X

  • Revs +3% to 2.01bn (+1% ex fx), GM 71.9% vs 74.2%, OM 28% vs 31.4%

  • FY18 Guidance: Revs +1-2.5%, better organic growth offset by lower benefit from fx, EPS unchanged, FCF raised to 1.2-1.35bn

  • Seeing improvements in global knee and hip sales, CEO feels more optimistic about opportunities for improvement, is excited about recent product launches and products to be launched by the end of the year positions the sales force to go on offence next year.

1Q18   1.91 vs 2.13, est 1.89

  • Revs +2.3% to 2.018bn (-1.5% ex fx), GM 72% vs 75.2%, OM 28.3% vs 32.1%

  • FY18 Guidance: Revs +1.5-3.5%, EPS 7.60-7.80, FCF 1.1-1.3

  • Results reflect current challenges/headwinds, guidance caps the remainder of the year and pushes improvements into FY19 and beyond. New CEO is confident of company’s positioning and room for improvement, sees 2-year turnaround.

4Q17   2.10 vs 2.14, est 2.1 down from 2.27, FY EPS 8.03

  • Revs +3% to 2.07bn (+1.5% ex fx), adj GM 72.7% vs 74.6%, OM 31% vs 32.3%

  • New CEO appointed in the quarter to improve execution and drive growth, sales force previously underutilized and disengaged, new CEO seeks to boost morale from behind handcuffed from not having full sales bag due to constraints and product misses, need to solidify common culture between Zimmer and Biomet legacy employees

  • 1Q Guidance: Revs 1.955-1.995bn (est 2.01b, -1% to +1%), EPS 1.84-1.91 (est 2.02), 1H headwinds and improvements in 2H, gradual improvement into 2019 until they get back on offense.

3Q17   1.72 vs 1.79, est 1.76 down from 1.83

  • Revs -0.8% to 1.818bn, -1.1% ex LDR acquisition

  • Guidance: lowered FY Revs 7.76-7.80, EPS 8.01-8.07, 4Q Revs 2.01-2.05bn (0-2% growth), EPS 2.08-2.14 (vs 2.14, est 2.27), while 4Q guidance is lower than estimates and dealing with supply issues is taking longer, they are getting closer to sorting out their supply issues (expect additional capacity starting 2Q18). Solid cash flow quarter, 463m vs 353m, repaid $259m of debt, $940m YTD. Also mgmt. is confident that new products to launch over next 18 months will contribute to growth.

2Q17   2.08 vs 2.02, est 2.10

  • Revs +1.1% to 1.95bn, -1.3% ex LDR acquisition

  • Revs fell short of expectations due to some product delays, mgmt. expects to clear out back-orders and build sufficient safety stock by the end of the year to start playing offense

  • Guidance: 3Q Revs 1.815-1.845bn, EPS 1.72-1.77, FY Revs 7.8-7.87bn, adj EPS 8.20-8.30

1Q17   2.13 vs 2.01, est 2.11

  • Revs +3.8% to 1.98bn (est 1.96bn), +4.5% ex fx, +2.3% ex LDR acquisition

  • Made progress to improving their supply chain, implementing process improvements on some legacy Biomet brands as part of FDA compliance issues, resulted in some prodn delays resulting in lower than expected inventory of finished goods, seeing more consistent prodn in recent weeks.

  • Guidance: 2Q Revs 1.94-1.96bn (est 1.99), EPS 2.08-2.13 (est 2.17)FY ex fx Revs +3.2% to 4.2% including LDR, previous guidance was +3.7%-4.7%, adj EPS 8.50-8.60 vs 7.96 and prior guidance of 8.50-8.68, est 8.60, FY18 est9.37

  • Stock sold off almost 6% in response to lowered guidance