Investor's Business Daily, February 1st, 2008
Zimmer Holdings is one of those solid, mind-numbingly consistent companies that almost never has a bad quarter and almost never causes excitement on Wall Street.
That changed last week when the maker of reconstructive orthopedic implants watched its stock push up 18% over a four-day period. Shares continued to edge higher early Friday.
The big surge -- 13% -- came on Tuesday, when Zimmer ZMH topped fourth-quarter profit views and offered a better-than-expected outlook for 2008.
Quarterly earnings came in at $1.18 a share, up 16% from the prior year and well above Wall Street estimates of $1.04. Revenue rose 15% to $1.07 billion, also above views.
Zimmer offered 2008 earnings guidance of $4.20 to $4.25 a share, up from $4.05 last year. It guided sales growth of 10% to 11%, which would put revenue at $4.33 billion on the high end.
Most analysts had called for earnings of $4.21 a share and sales of $4.18 billion.
Zimmer said its 2008 guidance reflects expected costs for a number of initiatives, including upgrades to its U.S. sales and distribution operation as well as higher investments in its sales force.
Doug Schenkel of Cowen & Co. noted that Zimmer's fourth-quarter results were helped by lower-than-expected operating and research expenses.
Those lower costs pushed Zimmer above Schenkel's operating margin forecast, but he's taking a wait-and-see approach on Zimmer's cost model for 2008.
"While we appreciate the level of detail provided on spending, and are encouraged by commentary on positive cross-market trends, we remain cautious in the near term pending more details on a series of previously highlighted company-specific challenges," Schenkel wrote in a report.
One thing many analysts noted was that Zimmer's management team, in place less than a year, has begun to put its stamp on the business.
The current chief executive, David Dvorak, took the helm in May. He replaced Ray Elliott, who had spent a decade with the company and became CEO following its 2001 spinoff from Bristol-Myers Squibb BMY.
"People are still getting familiar with the new management style," said Bill Plovanic, managing director at Canaccord Adams. "This is really the first year where they set their own numbers."
In a note to clients, UBS analyst Bruce Nudell said Zimmer's new management team seems "to be firmly in control of the company's tactical and strategic direction."
Foreign Boost
Like many U.S. companies, Warsaw, Ind.-based Zimmer has been getting a lift from overseas business -- particularly in light of the weak dollar.
Zimmer's fourth-quarter U.S. sales rose only 11% to $594 million, while sales in Europe gained 23% to $329 million and sales to Asia-Pacific markets climbed 16% to $150 million.
Banc of America Securities analyst Steven Lichtman noted that the foreign exchange rate had a 5% revenue impact during quarter.
"Management noted an uptick in worldwide procedural volumes, particularly in the hip/knee market," said Lichtman, whose employer has done business with Zimmer. "The reason for the acceleration in Q4 in Europe and Asia-Pacific is unclear to us (and management)."
Rare Spike
Zimmer reported solid sales gains across its product portfolio during the quarter. Sales in its knee segment rose 14% to $445 million, topping some estimates.
Sales of hip products moved up 12% to $359 million.
The company's 15% overall revenue increase was its best top-line showing since the second quarter of 2005, when sales also climbed 15%.
Zimmer has now run off five straight quarters of double-digit sales growth. It had run off four straight quarters of 10% growth before its latest report.
Earnings have risen in double digits six quarters in a row, ranging from 10% to 20%.
Last week's stock surge was a rarity for Zimmer. The last time its shares rose in double digits over a short period of time was in July 2006.
Though the stock has its occasional peaks and valleys -- including a 15% drop in October when Zimmer cut its fourth-quarter guidance -- shares have largely gone sideways over the past three years.
Thomson Financial analysts predict decelerating earnings growth over the near term. They see a 6% gain this quarter and next, followed by a 4% rise in the third quarter and 1% gain in the fourth.
The slumping economy shouldn't hurt Zimmer, Plovanic says. In fact, it might be a plus.
"Historically health care has been a defensive sector, and orthopedics is actually in recovery mode right now," he said. "Typically in a down economy any cosmetic procedures tend to slow down, so that might help Zimmer expand those businesses."
