Why Is Zimmer (ZBH) Down 12.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Zimmer Biomet (ZBH). Shares have lost about 12.5% in that time frame, underperforming the S&P 500.

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

Zimmer Biomet Gains From Strength in Knee Arm in Q4

Zimmer Biomet posted fourth-quarter 2019 adjusted earnings per share (EPS) of $2.30, surpassing the Zacks Consensus Estimate by 1.8%. The figure also improved 5.5% year over year.

On a reported basis, EPS came in at $1.54 against the year-ago loss of $4.42 per share.

For the full year, adjusted earnings improved 3% to $7.87 from the 2018-level and also exceeded the Zacks Consensus Estimate by 0.5%.

Revenue Details

Fourth-quarter net sales of $2.13 billion increased 3% (up 3.9% at constant exchange rate or CER) year over year. The figure also exceeded the Zacks Consensus Estimate of $2.11 billion by 0.8%.

Full-year net sales of $7.98 billion increased 0.6% from the 2018 figure (up 2.2% at CER). This too topped the Zacks Consensus Estimate by 1%.

During the fourth quarter, sales generated in the Americas totaled $1.29 billion (up 2.4% year over year at CER) while the same in EMEA (Europe, the Middle East and Africa) grossed $471 million (up 1.4% year over year at CER). Asia-Pacific registered 8.6% growth at CER to $367 million.

Segments

Sales in the Knees unit improved 4.9% year over year at CER to $761 million. Hips recorded a 3.2% increase at CER from the prior-year quarter’s $511 million. Revenues in the S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) unit rose 3.1% year over year to $474 million.

Among other segments, Spine & CMF (Craniomaxillofacial) inched up 0.2% at CER to $197 million while Dental rose 5% to $109 million. Other revenues were down 7.7% to $74 million.

Margins

Gross margin after excluding intangible asset amortization came in at 72.6%, reflecting an expansion of 78 bps in the fourth quarter. Selling, general and administrative expenses dropped 11.7% to $882.2 million. Research and development expenses rose 19.7% to $121.1 million. Adjusted operating margin grew 669 bps to 25.4% during the quarter.

Cash Position

Zimmer Biomet exited the year with cash and cash equivalents of $617.9 million compared with $542.8 million at 2018 end. Long-term debt at the end of 2019 totaled $8.22 billion, reflecting a reduction from $8.94 billion at the end of 2018.

Cumulative net cash provided by operating activities at the end of 2019 was $1.59 billion compared with $1.75 billion a year ago.

2020 Guidance

The company provided its 2020 guidance. Full-year sales growth is projected in the range of 2.5-3.5% compared with the 2019 expectation. Management noted that there will be an overall neutral impact from currency movement in 2020 (expectedto be negative in the first half of the year and slightly positive in the second half). Adjusted EPS for 2020 is envisioned in the $8.15-$8.45 band.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Zimmer has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. 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. It comes with little surprise Zimmer has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.