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Zimmer Biomet: A Look at Its Latest Valuation

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Apr. 11 2016, Updated 12:08 a.m. ET

Peer comparison

On April 1, 2016, Zimmer Biomet Holdings (ZBH) was trading at a forward PE (price-to-earnings) ratio of ~13.2x compared to the industry average of 18.6x. Over the last 12 months, the company’s forward PE ratio has been in the range of 11.6x–16.5x. Its five-year average forward PE ratio stands at 14.2x.

The company is trading at a discount compared to the industry average and peers Johnson & Johnson (JNJ), Stryker (SYK), and Medtronic (MDT), which are trading at forward PE ratios of 16.6x, 18.6x, and 16.3x, respectively.

valuation

Forward PE ratio is calculated as the stock price of the company divided by its next 12-month earnings estimate. The measure is used to compare the company’s growth potential with its peers with a forward-looking focus.

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Stock price performance

As of April 6, 2016, Zimmer Biomet’s share price was $108.06, representing a rise of 10.8% since the company’s 4Q15 earnings release on January 28, 2016. The stock traded at a 52-week high of $119.10 on April 23, 2015, and a 52-week low of $88.27 on February 12, 2016.

In YTD (year-to-date) returns, Stryker and Johnson & Johnson led Zimmer Biomet and returned 14.4% and 8.9%, respectively, against Zimmer Biomet’s 5.4% returns. Medtronic generated 2.0% returns.

Zimmer Biomet’s fundamentals

Zimmer Holdings changed its name to Zimmer Biomet Holdings after the acquisition of Biomet in June 2015. The two companies hold a strong musculoskeletal product portfolio in complementary product segments and geographies. The combined company became the second-largest orthopedic company in the United States, behind Depuy Synthes, a subsidiary of Johnson & Johnson.

In 2015, Zimmer Biomet reported lower-than-expected revenues and weak earnings. According to the company’s guidance as well as analyst estimates, Zimmer Biomet is expected to report weak revenue growth in 2016. Integration costs and currency headwinds will impact the company’s financials in the short term. Once the integration is complete, strong fundamentals, higher market share, strong product portfolios, and integration synergies will drive the company’s growth. These could make it an attractive long-term investment stock.

Investors seeking focused exposure to Zimmer Biomet can consider investing in the iShares US Medical Devices ETF (IHI), which has ~3.8% of its total holdings in ZBH.

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