Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the EnterprisingÂ Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Zimmer Holdings Inc. (ZMH)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Zimmer Holdings, Inc. (Zimmer) designs, develops, manufactures and markets orthopaedic reconstructive, spinal and trauma devices, biologics, dental implants and related surgical products. The Companyâ€™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.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$69.28|
|Value Based on 0% Growth||$40.61|
|Market-Implied Growth Rate||6.45%|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Zimmer Holdings is suitableÂ for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is concerned with the short dividend historyÂ and the high PEmg and PB ratios. Â The Enterprising InvestorÂ has no initial concerns. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. Â From a valuation perspective,Â the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.28 in 2010 to an estimated $4.78 for 2014. Â This level of demonstrated growth does not supportÂ the market’s implied estimate of 6.45%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Zimmer Holdings Inc. (ZMH)Â for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Zimmer Holdings Inc. (ZMH)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold aÂ position in Zimmer Holdings Inc. (ZMH)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.