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Can Zimmer Biomet Have Consistent Operating Margin Expansion?

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Zimmer Biomet’s 1Q17 margins

For fiscal 1Q17, Zimmer Biomet Holdings (ZBH) reported 75.2% gross margins, representing a fall of about 50 basis points compared to the prior year. The fall can primarily be attributed to price reductions and lower gains from the company’s cash flow hedging program. ZBH’s operating margin came in at around 32.1% of total revenues. Operating margin expansion is a key growth strategy for the company, as you can see in the chart below.

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The company’s SG&A (selling, general, and administrative) expenses as a percentage of sales also rose. Growth was driven by increased freight expenses, acquired businesses’ expense infrastructure, and a specialized sales force. However, the acquisition synergies offset some of the SG&A growth. R&D (research and development) expenses remained consistent.

By comparison, peers Medtronic (MDT), Boston Scientific (BSX), and Abbott Laboratories (ABT) registered operating margins of ~18.0%, ~17.0%, and -3.2%, respectively, as a percentage of sales in their most recent quarters.

Future expectations

ZBH’s margins are expected to rise in the coming quarters. Its gross margin is expected to improve to about 74.7% in fiscal 1Q17. Its operating income for fiscal 2017 is expected to be around 29.0% of its total sales. Amid manufacturing issues, pricing pressures, and certain recall issues, Zimmer Biomet Holdings has exhibited strong underlying strength. It’s been driven by its strong product portfolio, manufacturing optimization initiatives, and wide geographic presence.

Investors seeking exposure to Zimmer Biomet Holdings through ETFs can invest in the iShares MSCI USA Minimum Volatility (USMV), which has 0.15% of its total holdings in the company.

Next, let’s look at ZBH’s capital allocation strategy in 2017.

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