ZBH Stock to Gain From Volume Growth Amid Rising Costs

Zimmer Biomet’s ZBH strategic priorities, new product launches and focus on international expansion bolster our confidence in this stock. Yet, the difficult macroeconomic situation and leveraged capital structure are concerning. The stock carries a Zacks Rank #3 (Hold).

Favorable Factors For ZBH

Despite challenging market conditions in the form of pricing pressure, the last few quarters witnessed gradual stability in the global musculoskeletal market with better-than-expected sales growth in certain geographies, banking on improved procedural volume. This was driven by favorable demographics and the growing utilization of musculoskeletal healthcare in emerging markets and under-penetrated developed markets. The focused execution of the company's global sales teams amid a stable global musculoskeletal market also helped accelerate global sales for Persona, the personalized knee system.

In line with this, in the fourth quarter of 2024, the company witnessed growth driven by continued procedure growth, strong execution and solid momentum in terms of innovation. The company saw another positive quarter of year-over-year momentum in large joints, with the overall global Knees, Hips and S.E.T. business growing 5.6%, 4% and 8.4%, respectively, at constant exchange rate.

Zimmer Biomet is diligently working to strengthen its foothold in international developed and emerging markets that provide long-term opportunities for growth. The company's strategic investments in these regions over the past several quarters to improve operational and sales performance are yielding results. The company’s business particularly benefited from its strong presence in emerging markets with an extended portfolio that includes upper and lower joints. According to the company, this will help develop the extremities and trauma business going forward.

Within emerging markets, we note that strength in the Asia Pacific market has driven strong revenue growth so far. Banking on a series of product launches and strong customer adoptions, Zimmer Biomet is successfully expanding its presence in the emerging market.

Zimmer Biomet Holdings, Inc. Price

Zimmer Biomet Holdings, Inc. price | Zimmer Biomet Holdings, Inc. Quote

Over the past three months, shares of ZBH have gained 6% against the industry’s 4.4% dip. With the company consistently focusing on strategic market expansion and new product launches, we expect the stock to gain further momentum in the coming days.

Factors Impacting ZBH Stock's Growth

The ongoing industry-wide trend of staffing shortages and supply chain-related hazards is denting Zimmer Biomet’s growth. Deteriorating international trade and geopolitical complications lead to a tough situation related to raw material and labor cost as well as freight charges. Added to this, high policy rates to fight inflation, along with the gradual withdrawal of fiscal policies amid high debt, continue to dent economic growth, thus impacting the overall market situation for Zimmer Biomet. Within the Hip category, headwinds in Russia are disproportionately impacting the outside U.S. business. Further, within the S.E.T. category, Zimmer Biomet is facing challenges in the form of reimbursement headwinds, particularly in the Restorative Therapies business. In addition, the company also noted acute supply challenges within Sports and Trauma. All these are creating significant pressure on the company’s revenues and operating profit.

During the fourth quarter, the company incurred a 5.1% increase in cost of product sold (excluding intangible asset amortization) and a 3.4% rise in selling, general and administrative expenses. Adjusted gross margin reflected a contraction of 123 basis points while the adjusted operating margin contracted 43 bps in the quarter. Our model projects a 5.7% and 4.2% increase in the company’s cost of product sold and selling, general and administrative expenses, respectively, in 2025.

A substantial portion of Zimmer Biomet’s foreign revenues is generated in Europe and Japan. In recent times, significant increases in the value of the U.S. dollar relative to euro, the Japanese yen, the Swiss franc or other currencies are having an adverse effect on the company’s results of operations. In 2024, Zimmer Biomet’s net sales were affected by 1% from changes in foreign exchange rates. The company currently expects foreign exchange to have an adverse impact of 1.5%-2% on 2025 revenues.

Key Picks

Some better-ranked stocks in the broader medical space are Masimo MASI, Boston Scientific BSX and Cardinal Health CAH. At present, Masimo sports a Zacks Rank #1 (Strong Buy), whereas Boston Scientific and Cardinal Health carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Masimo’s shares have rallied 18.6% in the past year. Estimates for MASI’s 2024 earnings per share (EPS) have increased 1.2% to $4.10 in the past 30 days. MASI’s earnings beat estimates in each of the trailing four quarters, the average surprise being 17.1%. 

Estimates for Boston Scientific’s 2025 EPS have jumped 2.9% to $2.85 in the past 30 days. Shares of the company have surged 49.5% in the past year compared with the industry’s growth of 10.8%. BSX’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 8.25%. 

Estimates for Cardinal Health’s fiscal 2025 EPS have increased 1.5% to $7.94 in the past 30 days. Shares of the company have jumped 23.9% in the past year against the industry’s 2.4% decline. CAH’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 9.6%.

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This article originally published on Zacks Investment Research (zacks.com).

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