Zimmer’s Quarterly Earnings Lack Backbone

Medical device designer and manufacturer Zimmer Holdings (NYSE: ZMH  ) reported in for its quarterly earnings checkup -- and Dr. Wall Street is not completely sure what to make of it.

Say ahhh...
Zimmer reported total revenue of $1.026 billion, nearly flat from the same quarter last year. Net income totaled $178.1 million, a 7% decline from Q3 2011. Earnings did beat Wall Street expectations, though. The $1.15 per share, not including one-time writedowns, appeared to be the bright spot on an otherwise unexciting report. 

The outlook on Zimmer's earnings will differ depending on the eye of the beholder. The bears will point to a 7% decline in net earnings for the quarter, and flat or declining revenues across its more profitable segments: reconstructive, knees, and hips. Conversely, the bulls might overlook the overall sales numbers, and focus on how revenue increased when considering constant currency, and how it hit the high end of their earnings per share targets excluding one-time writedowns.

Zimmer also used the earnings release as an opportunity to discuss the repurchase of 1.56 million of its shares. Management plans to continue a sharp share buyback program -- it has bought back over 40 million shares since 2009. It also used the earnings release to announce the acquisition of Domoch Medical Systems, a waste fluid management and disposal technology firm.

What a Fool believes
Nearly all medical device companies reported their earnings for the quarter thus far. The symptoms of flat sales and declining earnings point to an ailing industry, yet many individual companies seem to be in stable condition. Several hospitals and insurers report that individuals are forgoing major reconstructive surgeries until economic conditions pick up. So it looks as though the industry as a whole is simply suffering from "stagnationitis."

Big players, like Johnson and Johnson (NYSE: JNJ  ) and Medtronic (NYSE: MDT  ) , can rely on their hundreds of other products and services to get them through these tough times. These two big guns both increased net income this quarter in comparison to Q3 2012. Zimmer, which focuses primarily in spinal and reconstructive surgery, will be more exposed to slowdown than the industry giants. Several companies who specialize like Zimmer have seen similar results for the quarter. Spinal treatment rival NuVasive (Nasdaq: NUVA  ) also topped EPS estimates when excluding one-time writedowns, but its revenue numbers lagged expectations.

The strong push to reduce total shares outstanding has kept EPS flat, but management's guidance for the rest of the year expects revenue and earnings to slide even further. A current shareholder may be encouraged that their share value remains strong, but the decline in earnings might not be the best sign of company health.

Company

Growth (5yr estimate)

Dividend yield

Payout ratio

Johnson & Johnson

1.33%

3.4%

77%

Medtronic

4.7%

2.5%

30%

Zimmer Holdings

3.11%

1.2%

8%

Source, Yahoo! Finance

Growth projections for the company are not promising, and the continued malaise of the industry gives little evidence it will improve soon. Investors might sniff at the company's dividend, but there are much better dividend plays within the space. I would look more toward Johnson & Johnson for a pure dividend play, or Medtronic for a combination of healthy growth and a decent dividend yield.

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