Boomer Pain Is Zimmer's Gain

Today's retirees are leading more active lives than ever before. Baby boomers in search of enhanced and longer lives are picking up tennis, running, swimming, cycling, dancing and a myriad of other activities to the benefit of their overall health. But these interests often come at the expense of aching joints and recurring injuries. Zimmer Holdings (NYSE:ZMH) is a leading orthopedic medical supplier with a growing target market that could prove to be a recession-proof investment. (To learn more about what to do when the sun sets on a burgeoning market, read Recession-Proof Your Portfolio.)

Workout Ethics
We can't blame it all on swimmer Dara Torres who, at age 41, proved that age alone does not have to be a limiting factor. At the 2008 Beijing Olympics, Torres successfully competed against women half her age, in some cases, and came away with three silver medals in swimming. The courage and commitment to push the human body to new heights (or simply to stay active for good health) has contributed to the rise in visits of baby boomer retirees and younger competitors to the offices of orthopedic surgeons.

Orthopedic Research
According to the American Academy of Orthopaedic Surgeons, a study conducted by the National Hospital Discharge Survey (NHDS) revealed that the total number of knee replacement surgeries more than doubled from 1994 to 2004. A separate study by NHDS showed that the mean age for recipients of knee replacements fell to 67.1 years in 2005 from 68.3 years in 2000. Another NHDS study revealed a solid upward trend in hip replacement surgeries, too, with an increase of nearly 54% from 2000 to 2005.

Zimmer's revenue is generated primarily from the sale of products for knee and hip replacement surgeries, followed by other products for shoulder repair. For the first half of 2008, knee and hip replacement products generated $1.6 billion in revenue and accounted for nearly 75% of Zimmer's total revenue. Although total revenue increased 11.34%, the company's operating profit fell 1.5% due to higher expenses.

Product Issues
Part of the higher expenses were a result of Zimmer's suspension of sales of its Durom Cup product out of a necessity to update labeling with better instructions for surgeons performing hip replacements. The suspension may result in $20-30 million in lost hip replacement revenue for 2008.

Valuation
Zimmer has a relatively strong PEG ratio of 1.10, which suggests strong expectations for earnings growth over the next five years. A lower price-to-sales ratio would make an even stronger case for Zimmer. Its current P/S ratio of 3.02 indicates that investors are paying $3.02 for each $1 of revenue generated. However, Zimmer's low beta of 0.48 means the stock is about half as volatile as a broad index, like the S&P 500. Its competitor, Stryker (NYSE:SYK), has equally low ratios with a PEG of 1.09 and a beta of 0.89. (For more on beta, read our related articles Beta: Gauging Price Fluctuations and Beta: Know The Risk.)

Performance
Zimmer is focused on a growing market of people striving to get the best out of their bodies and their lives. Given Zimmer's growth prospects and low stock correlation to the market, it is worth taking a closer look at this stock, even if you're not the one experiencing aches and pains. Zimmer is down 16.63% since January 2, 2008, while Stryker is down 25.61%. By comparison, the SPDR S&P 500 Index ETF (AMEX:SPY) is down 35.23%.

Investors should note that Zimmer reports third quarter results on October 23.