Zimmer Biomet's Valuation Offset By Lackluster Growth And Limited Near-Term Margin Leverage

Medical procedure volumes are gradually improving toward pre-pandemic levels, despite ongoing challenges with hospital staffing issues, and it’s time for Zimmer Biomet (NYSE:ZBH) to start delivering on the promises it has been making regarding leveraging R&D and improved go-to-market strategies to gain share in the ortho markets it serves and drive both attractive revenue growth and margin expansion.

I didn’t find a particularly compelling risk/reward opportunity with the shares when I last wrote about the company in early February of 2021, and with the shares down almost 25% since then (underperforming peers like Stryker (SYK) and the broader med-tech space), I don’t feel like I’ve missed out on much. While there have been signs of progress here and there, the reality is that the company’s performance in the ortho space on a two-year stack shows share loss in major joints.

I don’t think the valuation is particularly demanding if Zimmer can generate around 3% long-term revenue growth, mid-30%’s EBITDA margins, and high single-digit FCF growth. The real question, though, is whether or not the company can generate the sort of differentiated growth that will get investors to take a closer look – low-growth med-tech is a tough set-up for making money and I do have concerns that this could be a value trap.

 

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Zimmer Biomet's Valuation Offset By Lackluster Growth And Limited Near-Term Margin Leverage