Maintains Neutral.
- Baird notes ZMH is temporarily halting U.S. Durom sales and lowering 2008 revenue/EPS guidance (guidance cut related to Durom issues, slow new product uptake, sluggish U.S. dental market). Estimates/price target under review pending today's call, but believe upward bias to firm's Street-low '09 projections exists given significant share repurchases and lack of worldwide Durom recall (which our model had assumed). Despite this, they would not recommend buying on weakness unless shares fall to low $60s.
Neutral, $74 tgt.
- Morgan Stanley is the most positive of the bunch noting Q2 sales and EPS were generally in-line with expectations and support firm's view that orthopaedic implant market fundamentals are intact, and market share remains sticky. A reduction in 2008 EPS guidance, however, will more than overshadow Q2 results. While they believe that investors had expected a cut in guidance due to Durom (and they had already lowered #s), the reduction was more significant than expected Assuming a similar cut to 2009 numbers and applying a trough one-year forward multiple puts the stock at $66.
Firm awaits clarity on several issues on the conference call (namely on SG&A spending and the
non-Durom cuts to guidance) to revise their model. On the Durom issues alone, the after market sell off appears to be an overreaction, and they think the key to the stock recovering will be confirmation that the Durom issues and slower ramp of new products will be transient.
Maintains Overweight and $85 tgt.
Notablecalls: I'm very much inclined to pick up some ZMH in the low $60's as:
- Durom is not being recalled but rather temporarily halted. The $40 mln product will likely return to US market in Q3. As I understand it, the problems w/ Durom are related to surgeons not knowing how to use the product rather than the product itself. ZMH will take a qtr or two to educate the docs.
- Problems around dental demand should not come as a surprise. Dental represents less than 10% of ZMH revenue and is tied closely to the consumer. Just take a look at what PDCO, HSIC and XRAY have been saying. No surprise there.
- ZMH is a high quality name being pushed down on transitional problems. Around low-to-mid $60's one has the opportunity to pick up a 15% net grower at around 15x this yr EPS & 13x CY09. That's cheap. Especially in med-tech.
