Unveiling Zimmer Biomet Holdings (ZBH)'s Value: Is It Really Priced Right? A Comprehensive Guide
As of September 26, 2023, Zimmer Biomet Holdings Inc (NYSE:ZBH) has seen a day's change of -4.17% and a 3-month loss of -21.16%. Despite these statistics, its Earnings Per Share (EPS) stands at 2.41. The question arises - is the stock modestly undervalued? This article presents an in-depth valuation analysis of Zimmer Biomet Holdings Inc (NYSE:ZBH) to answer this question. Read on to uncover the true worth of this stock.
Company Overview
Zimmer Biomet Holdings is a leading player in the design, manufacture, and marketing of orthopedic reconstructive implants, alongside supplies and surgical equipment for orthopedic surgery. With its acquisitions of Centerpulse in 2003 and Biomet in 2015, the company holds a commanding share of the reconstructive market in the United States, Europe, and Japan. Approximately 70% of its revenue comes from sales of large joints, while the remaining quarter is derived from extremities, trauma, and related surgical products.
Currently, Zimmer Biomet Holdings' stock price stands at $112.46, while its fair value (GF Value) is estimated at $138.81. This comparison indicates that the stock may be modestly undervalued. To understand this valuation better, let's delve into the company's financials and the GF Value calculation method.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor derived from the company's past performance and growth, and future business performance estimates. The GF Value Line gives an overview of the ideal trading value of the stock.
For Zimmer Biomet Holdings (NYSE:ZBH), the GF Value suggests that the stock is modestly undervalued. This conclusion is drawn from the comparison of the stock's current price ($112.46 per share) with its GF Value. If the stock price is significantly above the GF Value Line, it indicates overvaluation and potential poor future returns. Conversely, if it is significantly below the GF Value Line, the stock may be undervalued and likely to yield higher future returns.
Given that Zimmer Biomet Holdings is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. A great way to understand a company's financial strength is by looking at its cash-to-debt ratio and interest coverage. Zimmer Biomet Holdings has a cash-to-debt ratio of 0.05, ranking worse than 95.6% of 841 companies in the Medical Devices & Instruments industry. Its overall financial strength is 6 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. Companies with high-profit margins are usually safer investments than those with low-profit margins. Zimmer Biomet Holdings has been profitable 8 times over the past 10 years. Over the past twelve months, the company had a revenue of $7.20 billion and Earnings Per Share (EPS) of $2.41. Its operating margin is 18.69%, ranking better than 82.3% of 836 companies in the Medical Devices & Instruments industry. Overall, Zimmer Biomet Holdings' profitability is ranked 7 out of 10, indicating fair profitability.
Growth is a critical factor in a company's valuation. GuruFocus research has found that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. However, the 3-year average annual revenue growth of Zimmer Biomet Holdings is -5.1%, ranking worse than 78.11% of 731 companies in the Medical Devices & Instruments industry. Its 3-year average EBITDA growth rate is -11.8%, ranking worse than 78.46% of 738 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Zimmer Biomet Holdings' ROIC was 5.05 while its WACC came in at 7.57.
Conclusion
Overall, the stock of Zimmer Biomet Holdings (NYSE:ZBH) is believed to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 78.46% of 738 companies in the Medical Devices & Instruments industry. To learn more about Zimmer Biomet Holdings stock, check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
