Zimmer Holdings: There's a Reason for Investors' Enthusiasm

Zimmer Holdings, Inc. (ZMH) can put the spring back in your step or the zing back in your swing. The company designs and markets orthopedic products, including reconstructive implants and fracture management devices. Reconstructive implants -- which restore function in knees, hips, shoulders, elbows, and teeth that have been exposed to trauma or disease -- account for more than three-quarters of sales. Products include the NexGen knee implant series and the VerSys system for hips. Zimmer also sells spinal implants, trauma products used to repair damaged bone and tissue, and surgical supplies, such as tourniquets and blood management systems. The company operates facilities in more than 20 countries and sells its products worldwide.

This company's jet-powered stock—up almost 50% in the last year—has received support from its 2006 introduction of a knee implant designed to suit the female body. Reducing the post-operative pain for women, the device is designed to enable women to remain more active than preexisting unisex models.

Sales for the second quarter are up 10% to $950.2 million compared to the same quarter last year. Analysts think revenues will increase by 13.5% a year, on average, over the next 5 years, earnings by 15% a year, on average, over the same time period. Earnings per share have gone from $2.41 in 2004 to $3.10 to $3.42. This year look for $4.00 and $4.50 next.

There was recently a management change. The chief executive officer, Ray Elliot, retired, replaced by David Dvorak, previously the company's chief legal officer. Mr. Elliot is staying on as chairman of the board at least until November. Also, the chief financial officer resigned to go to another firm. Questions have risen as to why the chief legal officer would become chief executive officer unless there might be legal problems. No legal challenges are known to analysts at this time. As for management skills, Mr. Dvorak has had meaningful operational experience.

Earnings look very good here. So do other numbers: Return on equity is a very healthy 17%. Net profit margin is 24%. Current assets are more than 3 times current liabilities. This is a large cap stock with a market cap of $21.4 billion (share price times the number of shares). Revenues should be $3.8 billion this year and $4.3 billion next year.

With a recent pullback from its all time high of $94 a share, it's a good time to look closely at ZMH. While there's nothing cheap about it with a P/E of 25, there's a reason for investors' enthusiasm. The company is making products serving a market that will only grow as populations get older. And you know they will.

ZMH 1-yr chart

Disclosure: none