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Zimmer Holdings Downgraded to Sell

Zacks Equity Research

On Dec 25, Zacks Investment Research downgraded Zimmer Holdings, Inc. (ZMH) to a Zacks Rank #4 (Sell) from Zacks Rank #3 (Neutral).

Why the Downgrade?

Zimmer Holdings has witnessed downward estimate revisions despite marginally surpassing our earnings estimates for third-quarter 2013. The sluggish European economy poses a threat to growth prospects and the pricing pressure is also a major headwind for the company going forward.

The Zacks Consensus Estimate for 2013 decreased 0.7% to $5.70 per share over the last 90 days. Likewise, the Zacks Consensus Estimate for 2014 dropped to $6.19 from $6.24 over a 90-day period, a fall of 0.8%.

On Oct 24, Zimmer had reported third-quarter 2013 adjusted earnings per share of $1.25, up 8.7% year over year, and a penny higher than the Zacks Consensus Estimate.

Though the company registered modest growth, the continuing global challenges remain an area of concern. Moreover, a decline of 160 basis points in gross margin in the third quarter due to higher mix of lower-margin product and geographic revenues, as well as manufacturing-related charges warrant attention.

A consistent fall in Spine sales for the last two years, mostly from the Americas, due to reimbursement and pricing pressure, shows that Zimmer needs to ramp up its portfolio to offset some of the lost sales.  Additionally, the huge competition in the medical devices market continues to pose a serious challenge as the company constantly needs to invest in research and development to introduce new products and garner market share.

Zimmer also revised its adjusted EPS for FY13 outlook to $5.70, which coincides with the lower end of the earlier guided range of $5.70−$5.80. The company reaffirmed its revenue outlook at 4.5% at CER. The currency movement is expected to lower revenues by 1.5% to 2.0% (earlier 2.0%), which in turn would lead to 2.5% to 3% revenue growth on a reported basis (earlier 2% to 3%).

Other Stocks to Consider

Investors interested in the medical devices industry can consider stocks like NuVasive, Inc. (NUVA) carrying a Zacks Rank #1 (Strong Buy) and Hill-Rom Holdings, Inc. (HRC)  and Cardinal Health, Inc. (CAH)  each sporting a Zacks Rank #2 (Buy).

Read the Full Research Report on ZMH

Zacks Investment Research