- By GF Value
The stock of Zimmer Biomet Holdings (NYSE:ZBH, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $163.51 per share and the market cap of $34.1 billion, Zimmer Biomet Holdings stock shows every sign of being significantly overvalued. GF Value for Zimmer Biomet Holdings is shown in the chart below.
Because Zimmer Biomet Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 2.08% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Zimmer Biomet Holdings has a cash-to-debt ratio of 0.10, which is in the bottom 10% of the companies in the industry of Medical Devices & Instruments. The overall financial strength of Zimmer Biomet Holdings is 4 out of 10, which indicates that the financial strength of Zimmer Biomet Holdings is poor. This is the debt and cash of Zimmer Biomet Holdings over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Zimmer Biomet Holdings has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $7 billion and loss of $0.71 a share. Its operating margin of 9.94% in the middle range of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks Zimmer Biomet Holdings's profitability as fair. This is the revenue and net income of Zimmer Biomet Holdings over the past years:
Growth is probably the most important factor in the valuation of a company. 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. The 3-year average annual revenue growth of Zimmer Biomet Holdings is -4%, which ranks worse than 71% of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth rate is -19.8%, which ranks worse than 87% of the companies in the industry of Medical Devices & Instruments.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Zimmer Biomet Holdings's return on invested capital is 1.56, and its cost of capital is 8.12. The historical ROIC vs WACC comparison of Zimmer Biomet Holdings is shown below:
Overall, the stock of Zimmer Biomet Holdings (NYSE:ZBH, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 87% of the companies in the industry of Medical Devices & Instruments. 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.