Several firms are commenting on Zimmer Holdings (NYSE:ZMH) following the Orthopedic device maker lowered its 2008 profit and sales forecast and suspended U.S. sales of one of its hip products on Tuesday, sending its shares nearly 10 percent lower:
- Piper Jaffray is downgrading the stock to Neutral from Buy due to: 1) Concerns raised by their ortho survey and field checks, and 2) product- and DOJ-related issues facing the company. Firm notes they are big believers of orthopaedics, but there are several near-term issues making them more selective, and more cautious on ZMH, specifically. They would view any near term strength as an opportunity to rotate into other names in their universe with fewer near-term challenges.
The results of their survey of 50 orthopaedic surgeons and our anecdotal industry checks indicate that the post-DOJ orthopaedic market will benefit small- to mid-sized players at the expense of larger players like ZMH, at least for now. In addition, 32% of the respondents to the survey indicated that they noticed an increase in patients deferring surgery, and 64% expect to see deferrals increase over the next year. ZMH is the market leader and most affected by a slowdown in procedures – a scenario that the Street appears to have written off at the moment. Thus far, Q2 is showing a bounce-back from Q1, but the firm worries about unexpected share and volume trends over the next few quarters.
Firm's 12-month price target is $79, which is based on a 15x PE multiple on projected 2010 EPS of $5.29. The previous analyst's price target was $88, based on 18x CY09E EPS of $4.88.
- Cowen notes the quarter was actually decent, with revenue beating, and EPS hitting, consensus expectations -- the latter is notable given that most recent Street adjustments had a $0.01/share negative bias due to ongoing Durom concerns.
However, the pre-announcement was necessitated due to: 1) AMH's decision to temporarily voluntarily suspend marketing and distribution of Durom in the U.S.; 2) weakness in U.S. Dental revenues; and 3) slower- than-anticipated uptake on certain new products. Consequently, despite what was essentially an in line Q2 performance, management reduced their expectations for FY sales growth from 10.0-11.0% (6.0-7.0% excluding FX) to 8.5%-9.0% (4.5%-5.0%) and EPS was guided down from $4.20-4.25 to $4.05-4.10. The more pessimistic H2 outlook appears to go beyond Durom -- pending additional details on the conference call, we note that broader implications for the group are possible
Applying a 16x multiple to the low end revised FY08 guidance suggests shares are likely to open in the mid-$60s.
