Zimmer Biomet Holdings, Inc. Fundamental Analysis

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Zimmer Biomet Holdings, Inc.

Last Updated: 14 Apr 2024

NYSE: ZBH

GICS Sector: Healthcare

Sub-Industry: Medical Devices

https://www.zimmerbiomet.com

You can download a summary of Zimmer Biomet Holdings, Inc's fundamental analysis in PDF here.

Management

Zimmer Biomet Holdings, Inc. Management

CEO: Ivan Tornos

Tenure: 3.1 years

Ivan Tornos has an extensive experience in the healthcare industry. He has been the President, CEO, and Director at Zimmer Biomet Holdings, Inc. since August 2023, after serving as the Group President of Global Businesses and the Americas at the same company.

Prior to joining Zimmer Biomet, Tornos held leadership roles at prominent organizations such as Becton, Dickinson and Company and Bard, where he served as Worldwide President of the Global Urology, Medical, and Critical Care Division. With a background spanning from Fortune 50 to 500 companies, Tornos has showed expertise in international business development, strategy, and general management.

He earned an MBA from the University of Miami School of Business and completed executive education programs at Harvard Business School and the Cox School of Business at Southern Methodist University.

Let us now analyze his compensation.

Zimmer Biomet Holdings, Inc. CEO compensation analysis over the last five years.

Zimmer Biomet Holdings, Inc. CEO Compensation Analysis. Source: Simply Wall St

The total compensation refers to the sum of all forms of payments and benefits received by the CEO per year. This can include salary, bonus, stock options, and other perks.

From the graph above, the CEO’s compensation has been inconsistent with the company’s performance over the past year. This can generally be a red flag.

Investors put money into companies expecting a return. If they see a disconnect between CEO pay and performance, they might be less confident in the company's ability to deliver those returns.

High pay regardless of performance can be seen as a lack of accountability for the CEO. If the company is struggling, but the CEO is still getting handsomely compensated, it raises questions about the effectiveness of the board of directors who set the CEO's pay.

Looking broadly at Zimmer Biomet Holdings, Inc.’s management team, it has an average tenure of 4.3 years. It is considered experienced.

Business Overview

Zimmer Biomet Holdings, Inc. Business Overview

Zimmer Biomet, a global leader in medical technology, develops, manufactures, and sells a comprehensive range of products to improve patients’ mobility and health.

Their offerings include orthopedic implants for joint replacements, sports medicine aids, trauma products, and surgical tools. They also leverage data and artificial intelligence in their innovative digital and robotic technologies.

KNEES

Knee replacements include total and partial options, with components like femoral components, tibial trays, and artificial surfaces. Their Persona® Knee, NexGen® Implants, and ROSA® Robot exemplify their advanced knee solutions.

HIPS

Hip replacements address both the femoral head and acetabulum. Procedures can be primary or revision surgeries, with Zimmer Biomet offering cemented or press-fit implants like the Taperloc® Hip System and G7® Acetabular System. Their ROSA® Robot can also be used in hip surgery.

Zimmer Biomet Revision Hip Arthroplasty. Source: Zimmer Biomet

S.E.T.

Beyond knees and hips, Zimmer Biomet's S.E.T. category encompasses a broad range of solutions.

Sports Medicine: Targets soft tissue injuries, particularly in the knee and shoulder (e.g., JuggerKnot® Soft Anchor System).
Biologics: Supports joint preservation or surgical procedures (e.g., Gel-One® Cross-linked Hyaluronate).
Foot & Ankle/Upper Extremities: Addresses arthritis and fractures (e.g., Comprehensive® Shoulder).
Trauma: Stabilizes broken bones for natural healing (e.g., Natural Nail® System).
CMFT: Reconstructs faces, skulls, and chests (e.g., SternaLock® System).

OTHER

Zimmer Biomet offers surgical tools, bone cement, and the ZBEdge™ Platform, which integrates robotics and digital technologies to provide surgeons with valuable data for informed patient care decisions.

In 2022, Zimmer Biomet spun off its spine and dental businesses to create a new company, ZimVie. This move allows both companies to focus more intensely on their core markets, ultimately aiming for faster growth and better value for their stakeholders.

The company caters to a wide range of customers, from large healthcare institutions to individual surgeons. They sell their products directly to hospitals and surgery centers, as well as through distributors and dealers. Notably, no single customer accounts for a significant portion of their sales.

To navigate the global healthcare landscape, Zimmer Biomet tailors its sales and marketing efforts by region while maintaining a consistent standard of service through global training programs. They closely monitor surgical advancements and the needs of medical professionals, allocating resources across three regional operating segments: Americas, Europe & Middle East/Africa, and Asia Pacific.

Zimmer Biomet Holdings, Inc. Product Revenue include Knees, Hips, Sports Medicine, Extremities and Trauma (S.E.T.), and Other.

Zimmer Biomet Holdings, Inc. Product Revenue for year ended 31 Dec 2023. Source: Gurufocus

Zimmer Biomet Holdings, Inc. revenue from these geographic areas of the United States and International.

Zimmer Biomet Holdings, Inc. Revenue Geographic Breakdown for year ended 31 Dec 2023. Source: Gurufocus

Strategy Overview and Competition

Zimmer Biomet Holdings, Inc. Strategy Overview and Competition

In 2023, Zimmer Biomet focused on three core strategies to propel the company forward.

First, they prioritized building a sound foundation by attracting and retaining top talent and fostering a positive work environment. Second, the company emphasized operational excellence, driving efficiency and effectiveness across all processes.

Finally, Zimmer Biomet committed to bold innovation and diversification, investing in internal R&D alongside strategic partnerships and acquisitions.

This three-pronged approach aimed to deliver long-term value for the company and its stakeholders.

Zimmer Biomet battles for market share in the fiercely competitive world of orthopedic and musculoskeletal care.

Major players like DePuy Synthes (Johnson & Johnson), Stryker, and Smith & Nephew go head-to-head with Zimmer Biomet for knees, hips, and other surgical implants. Smaller companies carve out niches by focusing on specialized areas within the industry.

The constant drive to develop superior technologies and improve existing products is key to Zimmer Biomet’s future success, as competition hinges on factors like innovation, quality, and customer service.

Zimmer Biomet Holdings, Inc. Economic Moat

Zimmer Biomet Holdings, Inc.Economic Moat

There are many ways to identify Zimmer Biomet Holdings, Inc.’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company.

Zimmer Biomet Holdings, Inc. has a wide economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

Zimmer Biomet Holdings, Inc. Economic Moat

Economic Moat: Wide

Zimmer Biomet’s wide economic moat stems from two major factors – its intangible assets and high switching costs.

Zimmer Biomet’s intellectual property portfolio forms a key intangible asset, acting as a moat that protects their evolving product lines. Each new generation of devices relies on the established intellectual property of previous versions.

The recent shift in the U.S. patent system, favoring first-to-file applications, strengthens this advantage for large companies like Zimmer. This incentivizes faster filing and more detailed applications, crucial for blocking competitors who might target future product improvements.

Furthermore, the mandated opposition review allows experienced legal teams like Zimmer’s to mount stronger challenges against competitor patents, further solidifying their market position.

However, its biggest intangible asset is the relationship established between Zimmer Biomet’s sales representatives and the surgeons.

Unlike other medical device companies, Zimmer Biomet’s reps go beyond sales. They act as surgical coaches, present during procedures, instructing surgeons on their tools and meticulously preparing the customized instrumentation needed for each surgery, ensuring efficiency and surgeon preference.

This personalized service is invaluable for high-volume surgeons performing numerous procedures a day, as it frees them to focus solely on the surgery itself.

Such entrenched relationships built over the years have not only helped lay the foundation of the company’s intangible assets, but also created high switching costs.

Switching costs are costs those customers or businesses incur because of changing brands, suppliers, or products. Although the most common switching costs are monetary, there are also psychological, effort-based, and time-based switching costs.

Surgeons spent a significant amount of time back in their residency training to learn how to use such tools and instrumentations for bone implants. As tools and instrumentations differ for each company, switching to another company’s products will require taking time out for training and developing relationships with new sales representatives.

It also means that the surgeons will work less efficiently during the initial period of using another company’s products, with the possibility of raising risks for the patients.

Zimmer Biomet Holdings, Inc. Performance

Zimmer Biomet Holdings, Inc. Performance Checklist

My quick performance checklist:

Has Zimmer Biomet Holdings, Inc.'s revenue consistently grown year over year for the past 5 years? Zimmer Biomet Holdings recorded the highest revenue of $7,982M in 2019. It declined the following year and since then it started picking up gradually.

Is the net income consistently increasing year over year for the past 5 years? No, it recorded a -$139M in 2020.

Has the cash flow from operating activities shown consistent year-over-year growth for the past 5 years? Inconsistent as it fluctuates year-on-year.

Has the free cash flow remained positive for the past 5 years? Yes.

Is the gross margin % consistent or growing over the past 5 years? It is consistent at around 70%.

Has the EPS shown growth over the past 5 years? No, due to a negative earning in 2020.

Zimmer Biomet emerged from the COVID-19 fog in 2023, with elective surgeries finally bouncing back after the Omicron variant and staffing woes threw a wrench into procedures in 2022. This, combined with a more efficient supply chain, patients returning for deferred surgeries, and exciting new product launches, fueled a 6.5% increase in net sales.

The good news extends to the bottom line. Net earnings skyrocketed to $1.02 billion in 2023, compared to just $290.2 million the year before.

This jump was driven by the sales surge, some favorable tax settlements, and a leaner operation. The company tightened its belts by reducing litigation, restructuring, and quality control costs. Furthermore, 2022's results were weighed down by significant impairment charges and an investment loss.

Zimmer Biomet Holdings, Inc. financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

Zimmer Biomet Holdings, Inc. Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Has free cash flow per share increased over the last 5 years? Inconsistent.

Zimmer Biomet Holdings, Inc. free cash flow per share has been inconsistent for the past 5 years.

Zimmer Biomet Holdings, Inc. FCF per Share

Management Effectiveness

Has Zimmer Biomet Holdings, Inc.'s ROE stayed within or above the 12%-15% range year over year for the past 5 years? No.

Zimmer Biomet Holdings, Inc. Management Effectiveness

Zimmer Biomet Holdings, Inc. ROE is below its industry average ROE.

Zimmer Biomet Holdings, Inc. Return on Equity

Has the ROIC stayed within or above the 12%-15% range year over year for the past 5 years? No.

Zimmer Biomet Holdings, Inc. ROIC is less than its WACC.

Zimmer Biomet Holdings, Inc. Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is increasing, which is something that an investor not would be pleased to see.

The number of Zimmer Biomet Holdings, Inc. shares outstanding has been increasing over the past 5 years.

Zimmer Biomet Holdings, Inc. Shares Outstanding (Million Shares)

Zimmer Biomet Holdings, Inc. Financial Health

Zimmer Biomet Holdings, Inc. balance sheet which includes total equity, total debt, and cash & short-term investments.

Zimmer Biomet Holdings, Inc. Financial Health (USD Million)

Current Ratio: 1.6 (pass my requirement of >1.0)

The trend of its current ratio has been relatively flat over the past 5 years but it is worse than the industry average.

Debt-to-EBITDA: 2.7 (pass my requirement of <3.0)

Interest Coverage: 7.1 (pass my requirement of >3.0)

Debt Servicing Ratio: 12.7% (pass my requirement of <30.0%)

Zimmer Biomet Holdings, Inc. Stock Performance

The graph below shows the cumulative total stockholder return on Zimmer Biomet common stock compared to the S&P 500 Stock Index and the S&P 500 Health Care Equipment Index.

The chart assumes $100 was invested on 31 Dec 2018 in Zimmer Biomet common stock and each index and that dividends were reinvested.

Zimmer Biomet Holdings, Inc. Stock Performance

Stock Performance. Source: Zimmer Biomet Holdings, Inc. 10K

Zimmer Biomet Holdings, Inc. Intrinsic Valuation

Estimated intrinsic value: USD $79.02

Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.

Average free cash flow used: USD $1,200M

Projected growth rate: 7%

Beta: 0.9

Discount rate: 7.5%

Ideal margin of safety: 30% (Uncertainty: Mid)

Price range after the margin of safety: <USD $56.00

Date of calculation: 14 Apr 2024

Zimmer Biomet Holdings, Inc. Valuation

I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.

The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.

Zimmer Biomet Holdings, Inc. estimated fair value and its 52-week range.

Zimmer Biomet Holdings, Inc. Intrinsic Valuation

Comparison of Zimmer Biomet Holdings, Inc. price-earnings ratio against its five closest industry peers.

Zimmer Biomet Holdings, Inc. Relative Valuation

Zimmer Biomet Holdings, Inc. Price-Earnings Ratio vs its Peers

Zimmer Biomet Holdings, Inc. price-earnings ratio for the past 5 years and its 5-year average.

Zimmer Biomet Holdings, Inc. Historical Price-Earnings Ratio

Additional Resources

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My Concerns

Zimmer Biomet’s success hinges on its ability to constantly innovate and market products effectively against a fierce competitor landscape. The company operates in an environment where technological advancements by rivals can rapidly render its offerings obsolete.

To stay ahead, Zimmer Biomet must continuously identify, develop, and acquire cutting-edge technologies while improving existing ones. This requires navigating a complex web of regulatory approvals, accurate demand forecasting, and efficient global product distribution – all while ensuring profitability.

Competition focuses on factors like technology, quality, reputation, and pricing. Outside the U.S., additional complexities arise due to local distribution systems, regulations, and varying medical preferences.

Competitors may possess superior resources, quicker innovation cycles, or more effective marketing and distribution channels. Pharmaceutical therapies also pose a threat, offering alternative treatments or affecting the conditions Zimmer Biomet’s products address.

Zimmer Biomet also faces challenges integrating acquired businesses, potentially compromising profitability. Acquisitions expose the company to unforeseen difficulties, including merging personnel, operations, and IT systems.

Harmonizing quality control and managing talent loss further complicate the process. Entering unfamiliar markets or inheriting unknown technological vulnerabilities adds risk. Unless Zimmer Biomet meticulously evaluates and executes acquisitions, they might not achieve financial goals and incur unexpected costs. These risks are especially amplified for larger acquisitions.

Zimmer Biomet offers a potential advantage with its wide economic moat, shielding it from direct competition. However, this is overshadowed by recent shortcomings in its performance and capital allocation strategies.

The company has also been steadily issuing more shares, which can dilute existing shareholder value. While the company boasts a healthy balance sheet, the overall picture is one of uncertainty. For investors to feel comfortable, a significant discount, or margin of safety, of at least 30% would be necessary to account for the potential risks.

My Concerns

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Zimmer Biomet Holdings, Inc. Fundamental Analysis