Zimmer Holdings (NYSE:ZMH) specializes in providing knee and hip replacements to patients across the globe. Close to a decade ago, the business was growing briskly and demographic trends were thought to be on Zimmer's side. The aging of the baby boomers in the United States and older individuals abroad were supposed to power Zimmer well into this century. Unfortunately, the latest recession has slowed Zimmer's prospects and the company has yet to return to its former glory.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

Recent Results and Outlook
Reported second quarter sales fell 1.1% to $1.1 billion. Backing out negative currency fluctuations, which stemmed from a stronger dollar that reduced reported overseas sales, the top line advanced a more respectable 1.8%. Cost cutting moves (the company is referring to them as "commercial and operational excellence programs") and backing out the foreign exchange changes resulted in recurring profit growth of 10.7% to $235.6 million, or $1.34 per diluted share.

Looking at the major product areas, reported knee and hip replacement sales fell 2% and 1%, respectively. These make up the vast majority of the total company top line. Smaller units, including trauma and surgical, grew 7% each, but were offset by an 8% decline in dental and 7% drop in spine. By region, both the Americas and Asia Pacific regions grew 1%, but were partially offset by a 6% decline in Europe.

For the full year, Zimmer expects modest sales growth between 2.5% and 3.5%, which ignores currency fluctuations. Backing out the fluctuations, reported growth should come in between zero and 1.5%. Earnings expectations are in a range of $5.25 and $5.35 per diluted share on an adjusted basis, and $4.75 to $4.85 on a reported basis.

SEE: A Primer On Currency Regimes

The Bottom Line
Zimmer has continued to struggle to grow since the Great Recession. Its track record over the past decade looks impressive. During this period, average annual sales growth has been above 14% and profits have advanced 18% each year over this time frame. However, this includes the past five years of results that have seen sales growth average less than 5% and earnings grow less than 3.5%.

Zimmer has turned to cost cutting to keep total profit growth moving positively forward, but doesn't appear to have any answers to returning to robust sales growth. During the earnings conference call, it spoke of solid results in international markets, but Europe has been a real drag and could continue to struggle for some time.

SEE: Great Expectations: Forecasting Sales Growth

On a positive note, the forward earnings multiple of just over 11 leaves room for upside, should growth trends start to perk up. However, rival Stryker (NYSE:SYK) has been able to grow faster in recent years and trades at less than 13 times forward expectations, which is also quite reasonable. Other firms operating in the medical device space, including Medtronic (NYSE:MDT) and St. Jude Medical (NYSE:STJ), also trade in the low teens. So do the diversified healthcare giants of Johnson & Johnson (NYSE:JNJ) and Abbott Labs (NYSE:ABT), which also operate sizable medical device units.

Add it up and there are likely better investment candidates than Zimmer in the medical field. Zimmer does again trade at a very reasonable P/E, which leaves room for upside should demand increase. There is also the potential for a buyout from a firm of Abbott or JNJ's size. It might also make sense for Stryker and Zimmer to combine forces and use any merger as an opportunity to cut corporate overhead even further.

At the time of writing, Ryan C. Fuhrmann was long shares of St. Jude but did not own shares in any other company mentioned in this article.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center