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Zimmer Biomet's (ZBH) Pandemic Recovery Slow, Margin Woes Stay

Zimmer Biomet Holdings, Inc.’s ZBH slow recovery in the Americas amid the emergence of a new strain of coronavirus remains a major concern. The company currently has a Zacks Rank #4 (Sell).

In the past six months, Zimmer Biomet has underperformed its industry. The stock has declined 18.8% compared with a 9.3% fall of the industry.

Zimmer Biomet ended the third quarter with a lower-than-expected revenue figure. The year-over-year decline in reported and constant currency revenues was concerning. Sales were soft in the Americas. In terms of operating segments, the company’s core divisions like Knees, Hips, and Dental & Spine registered significant year-over-year declines in revenues at CER.

In the quarter, Zimmer Biomet continued to face COVID-induced challenges and market pressure. According to the company, the third quarter was full of unexpected negative environmental impacts that were mostly out of control. The quarter brought greater COVID pressure than expected for Zimmer Biomet. According to Zimmer Biomet, the business recovery continued in August but then declined in September with the rise in Delta variant cases and increase in staffing shortage.

Zimmer Biomet Holdings, Inc. Price

Significant margin contractions and a slashed 2021 guidance are concerns too.

Gross margin, after excluding intangible asset amortization, was 69.8%, reflecting a contraction of 71 basis points (bps) in the third quarter. Selling, general and administrative expenses were up 1.6%. Research and development expenses rose 26.8%. Adjusted operating margin contracted 268 bps to 22.4% during the quarter.

This time, on a dismal quarterly performance, the company slashed its financial guidance for 2021. Reported revenue growth is expected in the range of 11.3% to 12.5% (from the earlier expectation of 14.5% to 16.5%) compared with the last year. Adjusted EPS for the full year is expected in the range of $7.32 to $7.47 ($7.65 to $7.95).

On a positive note, Zimmer Biomet ended the third quarter with better-than-expected earnings. In the quarter, the company saw an improving trend across a number of markets. Geographically, in the third quarter, EMEA grew 5.9% year over year, up 0.3% from the 2019 level. According to Zimmer Biomet, this is the first time that the region has posted growth since the start of the pandemic. The Asia Pacific grew 0.5% year over year, up from the 2019 pre-pandemic level.

In terms of operating segments, the sports extremity and trauma category increased 4.2% or 7.7% from the 2019 level, driven by continuing commercial specialization, new product introductions and the contribution from strategic acquisitions. The company’s ”Other” category grew 15.4% year over year driven by the ongoing demand for ROSA Knee as well as increased revenues from the launch of ROSA partial knee and hip applications.

Moreover, Zimmer Biomet’s spin-off decision of the non-core dental and spine business is expected to prove strategic.

Key Picks

A few better-ranked stocks in the broader medical space include AMN Healthcare Services, Inc. AMN, Apollo Endosurgery, Inc. APEN and Laboratory Corporation of America Holdings LH.

AMN Healthcare, carrying a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average. You can see the complete list of today's Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry over the past year. AMN has gained 46.5% versus the 57.2% industry decline.

Apollo Endosurgery, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 7%. The company‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.

Apollo Endosurgery has outperformed its industry in the past year. APEN has gained 50.4% versus the industry’s 4.8% fall.

Laboratory Corporation surpassed earnings estimates in each of the trailing four quarters, the average surprise being 25.7%. The company currently sports a Zacks Rank #1.

Laboratory Corporation’s long-term earnings growth rate is estimated at 10.6%. The company’s earnings yield of 9.4% compares favorably with the industry’s 3.4%.

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