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Zimmer (ZBH) Up 18.1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·4 mins read

A month has gone by since the last earnings report for Zimmer Biomet (ZBH). Shares have added about 18.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zimmer due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Zimmer Biomet Q1 Sales Suffer on Procedural Deferrals

Zimmer Biomet posted first-quarter 2020 adjusted earnings per share (EPS) of $1.70, which surpassed the Zacks Consensus Estimate by 22.3%. The figure however declined 9.1% year over year.

On a reported basis, the company registered loss of $2.46 per share, a significant decline from the year-ago earnings of $1.20 per share.

A significant year-over-year decline in the company’s first-quarter revenuesand operating margin, negatively impacted by the coronavirus outbreak, resulted in poor earnings performance of Zimmer Biomet.

Revenue Details

First-quarter net sales of $1.78 billion decreased 9.7% (down 8.9% at constant exchange rate or CER) year over year. The figure also missed the Zacks Consensus Estimate by 0.3%. The company noted that the coronavirus pandemic resulted in the deferral of elective procedures during the quarter.

During the first quarter, sales generated in the Americas totaled $1.10 billion (down 7.7% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $398 million (down 11.7% year over year at CER). Asia-Pacific registered 9.5% decline at CER to $285 million.

Segments

Sales in the Knees unit declined 8.3% year over year at CER to $630 million. Hips recorded a 9.7% drop at CER to $433 million. Revenues in the S.E.T. (Sports Medicine, Extremities and Trauma) unit declined 6.5% year over year to $333 million.

Among other segments, Dental, Spine & CMFT(Craniomaxillofacial and Thoracic) dropped 11.8% at CER to $252 million. Other revenues were down 11% to $136 million.

Margins

Gross margin after excluding intangible asset amortization came in at 72.7%, reflecting an expansion of 71 basis points (bps) in the first quarter. Selling, general and administrative expenses increased 4.1% to $828.9 million. Research and development expenses declined 3.2% to $98.4 million. Adjusted operating margin contracted 582 bps to 20.1% during the quarter.

Cash Position

Zimmer Biomet exited the first quarter with cash and cash equivalents of $2.43 billion compared with $617.9 million at 2019 end. Long-term debt at the end of the quarter totaled $7.72 billion, reflecting a rise from $6.72 billion at the end of 2019.

At the end of the first quarter, net cash provided by operating activities was $450.9 million compared with $283.6 million in the year-ago period.

2020 Guidance

Zimmer Biomet expects the decline in elective procedure volumes to intensify in the second quarter of 2020. Given the uncertainty related to the scope and duration of the pandemic and its ongoing impact on the deferral of elective procedures, the company is currently unable to gauge the expected impact on its overall all business in 2020. Accordingly, it did not provide any update on its full-year guidance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -241.57% due to these changes.

VGM Scores

At this time, Zimmer has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Zimmer has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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