Zimmer Biomet (ZBH): Buy, Sell, or Hold Post Q1 Earnings?

Over the past six months, Zimmer Biomet’s stock price fell to $92.59. Shareholders have lost 15.6% of their capital, which is disappointing considering the S&P 500 has climbed by 3.7%. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Zimmer Biomet, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Zimmer Biomet Not Exciting?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than ZBH and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Zimmer Biomet struggled to consistently increase demand as its $7.70 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and signals it’s a lower quality business.

2. Weak Constant Currency Growth Points to Soft Demand

We can better understand Surgical Equipment & Consumables - Diversified companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Zimmer Biomet’s control and are not indicative of underlying demand.

Over the last two years, Zimmer Biomet’s constant currency revenue averaged 4.8% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Zimmer Biomet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.8%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

Final Judgment

Zimmer Biomet’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 11.2× forward P/E (or $92.59 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

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