One of Wall Street's biggest winners of the day is Zimmer Biomet, a specialty industrial machinery company whose shares have climbed 8.3% to a price of $98.72 -- 8.41% below its average analyst target price of $107.79.
The average analyst rating for the stock is buy. ZBH may have outstripped the S&P 500 index by 8.0% so far today, but it has lagged behind the index by 35.4% over the last year, returning -16.1%.
Zimmer Biomet Holdings, Inc., together with its subsidiaries, operates as a medical technology company worldwide. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Zimmer Biomet's trailing 12 month P/E ratio is 21.9, based on its trailing EPS of $4.5. The company has a forward P/E ratio of 11.8 according to its forward EPS of $8.6 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the health care sector has an average P/E ratio of 22.94, and the average for the S&P 500 is 29.3.
To better understand the strength of Zimmer Biomet's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
ZBH's gross profit margins have averaged 11.7% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 1.2%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Zimmer Biomet's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2024 | 1,499,400 | 203,800 | 1,295,600 | 0.4 |
| 2023 | 1,581,600 | 291,100 | 1,290,500 | 10.46 |
| 2022 | 1,356,200 | 187,900 | 1,168,300 | -13.82 |
| 2021 | 1,499,200 | 143,600 | 1,355,600 | 24.07 |
| 2020 | 1,204,500 | 111,900 | 1,092,600 | -21.25 |
| 2019 | 1,585,800 | 198,400 | 1,387,400 |
- Average free cash flow: $1.26 Billion
- Average free cash flown growth rate: 0.9 %
- Coefficient of variability (the lower the better): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in ZBH have received an annualized dividend yield of 1.1% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Zimmer Biomet has a P/B ratio of 1.58. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Health Care sector, which stood at 3.19 as of the third quarter of 2024.
With a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with a flat trend, we can conclude that Zimmer Biomet is probably fairly valued at current prices. The stock presents poor growth indicators because of its strong operating margins with a stable trend, and an inflated PEG ratio.
