Zimmer Holdings (ZMH) Stays Neutral

We recently reiterated our Neutral recommendation on Zimmer Holdings (ZMH) with a target price of $59.0.

Zimmer reported first quarter fiscal 2010 earnings per share (EPS) of $1.02, beating the Zacks Consensus Estimate of $1.01 and the year-ago earnings of $0.95. Total revenues increased 7.1% year-over-year to $1,062.8 million.

Barring Spine Products (7% decline to $60 million), growth was witnessed across all the business segments at Zimmer – Reconstructive Implant (7% year-over-year growth to $814.5 million), Orthopedic Surgical Products (22% to $76.2 million), Trauma (6% to $60.4 million) and Dental (9% to $51.7 million).

Reconstructive Implants is the largest segment at Zimmer, which contributed 77% of the company’s total worldwide revenues. The product volume/mix for the reconstructive business contributed 4% of growth, the highest level experienced since the third quarter of fiscal 2008, when volume/mix trends were consistently in the mid to high single digits. We expect Zimmer to maintain this uptrend in future.

We are impressed with Zimmer’s strong research and development base, which is focused on the development of new products and surgical techniques. The company continues to introduce new products in the market at regular intervals and expands its product portfolio by employing innovative technologies across all its segments. All these activities help the company expand its top line. We expect the company to capitalize on the improved industry scenario by virtue of its strong product portfolio.

We also note that the percentage of population over age 65 in the US, Europe, Japan and other regions is expected to nearly double by the year 2030. Zimmer and other orthopedic companies are benefiting from this aging demography since knee and hip joints tend to wear out with age and need replacement.

However, we remain concerned about the pricing pressure witnessed by the company. Global selling prices decreased 1% in the first quarter of fiscal 2010 compared with the year-ago period. Moreover, we are concerned about the tough competitive scenario and the fact that Zimmer derives about 42% of its total revenue from international operations, which exposes it to currency fluctuation risk.

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