Earnings Preview: Zimmer Holdings - Analyst Blog

Zimmer Holdings (ZMH) is scheduled to release its fourth quarter and fiscal 2010 earnings on January 27, 2011, before the market opens. The company is expected to earn $1.19 per share on revenues of $1,108 million for the quarter and $4.26 per share on revenue of $4,198 million, for fiscal 2010, according to the Zacks Consensus Estimate.

Previous-Quarter Highlights

Zimmer Holdings reported an adjusted EPS of 96 cents during the third quarter, beating the Zacks Consensus Estimate by a penny and 9% higher than the year-ago quarter's 88 cents. The company reported net sales of $965 million, missing the Zacks Consensus Estimate of $995 million and was 1.1% lower from the year-ago quarter's $975.6 million. Despite the decline in revenue, earnings increased due to improved margins, a 7% decline in the share count, partially offset by higher interest expenses (up 240%).

Zimmer's Reconstructive implant recorded a 2% decline in revenue to $724 million due to a 12% decline in sales from Europe. In addition, barring Spine products (9% decline to $56 million); growth was witnessed across all other business segments including Surgical and other (9% annually to $78 million), Trauma (1% to $58 million) and Dental (2% to $49 million). Reconstructive implant accounted for 75% of total revenue.

Zimmer provided its outlook along with the quarterly results. For the fourth quarter, the company expects its revenue to increase by 0% -2% on a constant currency basis, and adjusted EPS of $1.17– $1.22. For fiscal 2010, the company expects its revenue to increase 2% on a constant currency basis (lower than the prior range of 3%–5%) and has tightened its EPS guidance range to $4.24–$4.29 (from $4.15-$4.35), following the decline in worldwide reconstructive growth.

Agreement of Analysts

Estimate revision trends among the analysts have been insignificant. Over the last 30 days, 1 analyst has lowered estimate for both the fourth quarter and the fiscal. While no upward revision has taken place for the quarter, one analyst has lowered the estimate for the fiscal over the past month. 

Zimmer faced several headwinds during the third quarter of 2010 such as slowdown in procedure volume, pricing erosion and weakness in the reconstructive business which forced the company to lower its 2010 sales guidance.

The major concern confronting Zimmer is pricing pressure. In the third quarter selling price declined 1.4% annually compared with a 0.9% decline in the second quarter of 2010 due to slowdown in the overall market, particularly in the Americas. Price erosion in the Americas was -1.6%, worse than the decline of 1.1% in the second quarter. Renegotiation of hospital contracts (prior to expiration) contributed to pricing pressure. Further deterioration of the pricing scenario would affect the company's top line.

Zimmer derives 75% of its sales from reconstructive implants (primarily hips and knees) which recorded a 10% sequential decline in sales during the previous quarter. Its hip and knee sales reported a decline of 9% and 11%, respectively, as the company continues to lose share.

Macro economic pressures together with the austerity measures added to the decline. The decline in demand for the reconstructive business has thus created an uncertain environment that might affect the top line of the company. We expect further clarity regarding these aspects at the call.

Magnitude of Estimate Revisions

The magnitude of revisions is moderate following the third quarter results. Overall, estimates for the fourth quarter have gone down by a penny to the current level of $1.19 in the last 90 days. For fiscal 2010, estimate remained consistent at $4.26.

Surprise

Going by past trends, we expect Zimmer to surpass estimates since it has exceeded expectations in the past four consecutive quarters. The company has a positive four-quarter average of 2.39%, which implies that, on an average, Zimmer has topped the Zacks Consensus Estimate by 2.39% over the last four quarters.

Our Recommendation

Zimmer offers a broad line of reconstructive implant and trauma products, as well as orthopedic surgical instruments. However, global pricing pressures together with weak procedure volumes continue to weigh on the knees and hips businesses. These along with the macro-economic pressures reduce visibility on the company's performance going ahead.

However, we view that Zimmer is on its way to achieving market growth through new product launches, employment of new technologies and expansion of its footprint in the growing China market.  Hence, we maintain our ‘Neutral' recommendation.