Has Zimmer Holdings Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Zimmer Holdings (NYSE: ZMH  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Zimmer Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.0% Fail
  1-Year Revenue Growth > 12% 5.5% Fail
Margins Gross Margin > 35% 74.8% Pass
  Net Margin > 15% 17.1% Pass
Balance Sheet Debt to Equity < 50% 31.2% Pass
  Current Ratio > 1.3 3.78 Pass
Opportunities Return on Equity > 15% 13.5% Fail
Valuation Normalized P/E < 20 17.59 Pass
Dividends Current Yield > 2% 1.2% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful; Zimmer announced its first dividend in December 2011. Total score = number of passes.

Since we looked at Zimmer Holdings last year, the medical equipment maker has seen its score rise by a point. Improved net margins are a promising sign for the future.

Zimmer makes products for hip and knee reconstruction, with recent market-share figures putting it slightly ahead of Johnson & Johnson (NYSE: JNJ  ) and Stryker (NYSE: SYK  ) . With access to an aging population as well as one whose exercise practices can lead to joint problems, Zimmer is undoubtedly in a growth market.

But recently, the company has seen some major headwinds. Health-care insurers and government agencies are trying to cut back on reimbursement payouts, while a slow economy has led many people to put off procedures that aren't absolutely critical.

Moreover, high-technology competition is coming up from below. MAKO Surgical (Nasdaq: MAKO  ) has seen sales of its RIO orthopedic procedure equipment jump strongly in recent quarters. As MAKO and Intuitive Surgical (Nasdaq: ISRG  ) have increased their penetration into different surgical procedures, patients and doctors are getting more comfortable with the systems. Their success will eventually threaten lower-tech solutions like Zimmer's, forcing Zimmer to take steps to innovate itself.

Zimmer's recent adoption of a dividend payout is a move in the right direction. But what will really make the difference for Zimmer is the potential growth from a recovering economy. If it can beat back its competitors, Zimmer could get a lot closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Zimmer Holdings may not be a perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Zimmer Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson, MAKO Surgical, and Zimmer Holdings. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical, Johnson & Johnson, MAKO Surgical, and Stryker, as well as creating a diagonal call position in Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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