Zimmer Holdings Inc. (ZMH) Quarterly Valuation

Zimmer_Logo_2012Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Zimmer Holdings Inc. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Zimmer Holdings, Inc. (Zimmer) designs, develops, manufactures and markets orthopaedic reconstructive, spinal and trauma devices, biologics, dental implants and related surgical products. The Company’s customers include orthopaedic surgeons, neurosurgeons, oral surgeons, dentists, hospitals, stocking distributors, healthcare dealers and, in their capacity as agents, healthcare purchasing organizations or buying groups. It manages its operations through three geographic segments: the Americas, which is consisted of the United States and includes other North, Central and South American markets; Europe, which is consisted of Europe and includes the Middle East and Africa markets, and Asia Pacific, which is consisted of Japan and Australia and includes other Asian and Pacific markets. In May 2013, Zimmer Holdings Inc acquired Knee Creations LLC. In June 2013, Zimmer Holdings Inc acquired NORMED Medizin Technik GmbH.

ZMH Chart

ZMH data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $98.06
MG Value $53.71
MG Opinion Overvalued
Value Based on 3% Growth $58.64
Value Based on 0% Growth $34.37
Market-Implied Growth Rate 7.87%
NCAV $5.39
PEmg 24.25
Current Ratio 4.07
PB Ratio 2.64

Balance Sheet – 12/31/2013

Current Assets $4,197,700,000
Current Liabilities $1,031,600,000
Total Debt $1,672,300,000
Total Assets $9,580,600,000
Intangible Assets $3,318,900,000
Total Liabilities $3,283,300,000
Outstanding Shares 169,800,000

Earnings Per Share

2013 $4.43
2012 $4.29
2011 $4.03
2010 $2.97
2009 $3.32
2008 $3.72
2007 $3.26
2006 $3.40
2005 $2.93
2004 $2.19

Earnings Per Share – ModernGraham 

2013 $4.04
2012 $3.79
2011 $3.51
2010 $3.28
2009 $3.40
2008 $3.33

Dividend History

ZMH Dividend Chart

ZMH Dividend data by YCharts

Conclusion:

Zimmer Holdings Inc. is not suitable for the Defensive Investor due to its lack of a solid dividend history along with its high PEmg and PB ratios.  However, the company passes all of the requirements of the Enterprising Investor, indicating that as long as the value investor is willing to conduct very thorough analysis, this company may present lower risk than some others.  As a result, Enterprising Investors following a ModernGraham approach based on Benjamin Graham’s methods should feel comfortable exploring this company along with other opportunities, such as through a review of ModernGraham’s valuation of Johnson and Johnson (JNJ) and 5 Outstanding Dow Components.  From a valuation perspective, the company appears to be overvalued as even though it has grown its EPSmg (normalized earnings) from $3.40 in 2009 to $4.04 in 2013, this historically demonstrated growth trails behind the market’s implied estimate for earnings growth of 7.87%.  Accordingly, the ModernGraham valuation model has estimated an intrinsic value that is below the market’s current price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Zimmer Holdings Inc. (ZMH)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Zimmer Holdings Inc. (ZMH) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.


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