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%

2.8%

Fail

 

1-year revenue growth > 12%

0.4%

Fail

Margins

Gross margin > 35%

74.9%

Pass

 

Net margin > 15%

16.9%

Pass

Balance sheet

Debt to equity < 50%

31%

Pass

 

Current ratio > 1.3

4.28

Pass

Opportunities

Return on equity > 15%

13.2%

Fail

Valuation

Normalized P/E < 20

16.52

Pass

Dividends

Current yield > 2%

1.1%

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 Dec. 2011. Total score = number of passes.

Since we looked at Zimmer Holdings last year, the company has managed to hold onto the point it gained from 2011 to 2012. The stock has also done reasonably well, rising about 15% over the past year.

Zimmer makes medical devices, with an emphasis on products to facilitate hip and knee reconstruction and replacement procedures. Because of the rapidly aging population both in the U.S. and in many foreign countries, demographic factors have pointed toward growth in the need for joint-related procedures for a long time.

But recall problems among several joint-replacement providers have wrought havoc in the industry. In particular, industry giant Johnson & Johnson (NYSE: JNJ  ) had to pull its Adept hip implant device in February, adding to a history of recalls that included the massive ASR hip implant back in 2010 that affected nearly 100,000 implants and led to thousands of lawsuits. Smith & Nephew (NYSE: SNN  ) did a voluntary recall of a similar all-metal hip implant last year, and Stryker (NYSE: SYK  ) had to recall its Rejuvenate implant as well, although neither company had nearly the exposure that J&J had with its products. Even Zimmer has had to address problems with its Durom Acetabular device, doing a recall in the Australian market last year.

Moreover, Zimmer had another unrelated major recall to deal with in December, covering its PEEK Ardis Inserter instrument, which is used in spinal surgery. The FDA issued a Class I recall, arguing that the PEEK Ardis Inserter can break into smaller pieces, making it unsafe and forcing a worldwide recall of all 315 of the existing units sold since mid-2008.

For Zimmer to improve, it needs to keep recall issues to a minimum and get growth moving in a stronger direction. Otherwise, the company will have trouble getting closer to perfection anytime soon.

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.

Johnson & Johnson's recall problem have some investors worried about whether the company is spread too thin to keep quality control up. Find out whether J&J is a good investment or a bad bet by checking out The Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now

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


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