Is Zimmer Biomet Holdings (ZBH) Modestly Undervalued? A Comprehensive Analysis
Zimmer Biomet Holdings Inc (NYSE:ZBH) recently saw a daily gain of 2.56%, although over the last three months, it has experienced a loss of 8.12%. The company's Earnings Per Share (EPS) is $2.41. These figures raise the question: Is the stock modestly undervalued? This article will provide a detailed valuation analysis to answer this question. Stay with us as we explore the intrinsic value of Zimmer Biomet Holdings.
Company Introduction
Zimmer Biomet Holdings Inc (NYSE:ZBH) designs, manufactures, and markets orthopedic reconstructive implants, supplies, and surgical equipment for orthopedic surgery. The company has a leading share of the reconstructive market in the United States, Europe, and Japan, thanks to the acquisitions of Centerpulse in 2003 and Biomet in 2015. The company's stock is currently trading at $120.83 per share with a market cap of $25.20 billion. However, the GF Value, an estimation of fair value, is $138.41. This discrepancy suggests that the stock might be undervalued.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is computed based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Zimmer Biomet Holdings (NYSE:ZBH) appears to be modestly undervalued according to the GuruFocus Value calculation. This suggests that the long-term return of its stock is likely to be higher than its business growth.
Assessing Financial Strength
It is vital to check the financial strength of a company before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Zimmer Biomet Holdings has a cash-to-debt ratio of 0.05, which is worse than 95.69% of 835 companies in the Medical Devices & Instruments industry. The overall financial strength of Zimmer Biomet Holdings is 6 out of 10, indicating fair financial strength.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. 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 82.08% of 826 companies in the Medical Devices & Instruments industry. Overall, the profitability of Zimmer Biomet Holdings is ranked 7 out of 10, indicating fair profitability.
Growth is an essential factor in the valuation of a company. The 3-year average annual revenue growth rate of Zimmer Biomet Holdings is -5.1%, which ranks worse than 78.04% of 724 companies in the Medical Devices & Instruments industry. The 3-year average EBITDA growth rate is -11.8%, which ranks worse than 78.6% of 729 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital to the weighted average cost of capital is another way to determine its profitability. 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 5.05, and its cost of capital is 7.36.
Conclusion
In conclusion, the stock of Zimmer Biomet Holdings (NYSE:ZBH) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 78.6% of 729 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.
