Is Zimmer Biomet Holdings Modestly Undervalued? A Comprehensive Analysis
Zimmer Biomet Holdings Inc (NYSE:ZBH) experienced a daily loss of -3.42%, and a 3-month loss of -10.7%. Despite these figures, the company's Earnings Per Share (EPS) stands at 2.41. This raises the question: is the stock modestly undervalued? In this article, we delve into a valuation analysis of Zimmer Biomet Holdings (NYSE:ZBH), providing insights into the company's operations, financial strength, profitability, and growth.
Company Overview
Zimmer Biomet Holdings Inc (NYSE:ZBH) is a leading player in the design, manufacture, and marketing of orthopedic reconstructive implants, supplies, and surgical equipment for orthopedic surgery. The company has solidified its market position with strategic acquisitions, including Centerpulse in 2003 and Biomet in 2015. Zimmer Biomet Holdings (NYSE:ZBH) holds a significant market share in the United States, Europe, and Japan. Approximately 70% of its total revenue comes from sales of large joints, with the remaining quarter derived from extremities, trauma, and related surgical products.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides a snapshot of the stock's ideal fair trading value.
Zimmer Biomet Holdings' current stock price of $116.23 per share suggests that it may be modestly undervalued. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns.
Being relatively undervalued suggests that Zimmer Biomet Holdings' long-term stock return is likely to be higher than its business growth.
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Financial Strength Analysis
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's critical to review a company's financial strength before deciding whether to buy shares. Zimmer Biomet Holdings has a cash-to-debt ratio of 0.05, which ranks worse than 95.92% of 833 companies in the Medical Devices & Instruments industry. Based on this, GuruFocus ranks Zimmer Biomet Holdings's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Companies with consistent profitability over the long term are generally less risky investments. Zimmer Biomet Holdings has been profitable 8 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%, which ranks better than 80.46% of 824 companies in the Medical Devices & Instruments industry. Overall, the profitability of Zimmer Biomet Holdings is ranked 7 out of 10, which indicates fair profitability.
Growth is a crucial factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. Zimmer Biomet Holdings' 3-year average annual revenue growth rate is-5.1%, which ranks worse than 78.15% of 723 companies in the Medical Devices & Instruments industry. The 3-year average EBITDA growth rate is -11.8%, which ranks worse than 78.79% of 726 companies in the same industry.
ROIC Vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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's ROIC is 5.05 while its WACC came in at 7.26.
Conclusion
In conclusion, Zimmer Biomet Holdings (NYSE:ZBH) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 78.79% of 726 companies in the Medical Devices & Instruments industry. To learn more about Zimmer Biomet Holdings stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
