Zimmer Biomet Holdings, Inc. (ZBH) designs, manufactures, and markets musculoskeletal healthcare products and solutions around the world. Shares of ZBH have been sliding since releasing a disappointing Q3 report last week. However, that may be overdone, presenting an opportunity for long-term investors. I am bullish on ZBH stock. (See Analysts’ Top Stocks on TipRanks)
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Lackluster Earnings
Last week, the musculoskeletal healthcare leader reported third-quarter net sales of $1.92 billion, down 0.3% from the prior-year period and 0.8% on a constant currency basis. Nonetheless, net sales rose 1.7% from the pre-pandemic third quarter of 2019 and increased 0.4% on a constant currency basis. Meanwhile, net earnings for the third quarter of 2021 were $145.6 million.
These results came as a disappointment to some analysts, rushing to cut the price targets for the company. For instance, Oppenheimer its price target to $181 from $190, while JPMorgan cut its target to $150 from $160. This explains the sell-off of the company’s shares, following its financial report.
Upbeat Management
Meanwhile, management remained upbeat about the future. They blamed the challenging environment due to the pandemic, re-iterating that business remains strong. “Despite the continued challenges and market pressures in the third quarter, we drove significant progress in the advancement of our business priorities and continued focus on execution to create value and deliver on our mission,” said Bryan Hanson, Chairman, President, and CEO of Zimmer Biomet.
“Our underlying business remains strong, fueled by our transformation and the launch of new innovative products that can make a difference for our customers and for patients. I continue to be incredibly proud of our team for their dedication, resilience, and performance during this challenging time.”
Strong Fundamentals
While investors have to wait for the ease of the pandemic to find out how strong Zimmer’s business is, time is on their side. The company operates in the musculoskeletal industry, dominated by two players – Stryker (SYK) is the other player.
The sector has substantial barriers to entry, meaning that these companies enjoy a duopoly and economies of scale. The duopoly provides the two companies plenty of pricing power, while the economies of scale allow them to produce products at a low cost.
Meanwhile, the sector is experiencing solid demand due to the massive aging of the baby boomer generation. That’s a worldwide trend that can be traced back to 2006, when the first baby boomer cohort crossed 60 years of age.
Then, there’s the Affordable Care Act in the U.S. that broadens the health insurance coverage base. This helps boost the demand for medical services.
Wall Street’s Take
The analyst community remains bullish. Zimmer Biomet holds a Strong Buy consensus rating, based on 14 Buys and three Holds assigned in the past three months. The average Zimmer Biomet price target of $175 implies 32.8% upside potential.
The Bottom Line
Zimmer has been in the right industry at the time, and the recent sell-off could be a buying opportunity for long-term investors.
Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of Zimmer Biomet Holdings.
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