3 Reasons Zimmer Holdings Inc.'s Stock Could Rise

Zimmer Holdings has underperformed its top orthopedic device competitors year to date, but this medical device leader could be poised for a big rebound in the years to come

Sep 4, 2014 at 1:47PM

Big-name mergers have dominated the healthcare landscape in 2014, and Zimmer Holdings(NYSE:ZMH) deal to acquire rival orthopedic device maker Biomet back in April shook the market as much as any other major acquisition. But Zimmer investors have yet to reap the rewards of this bold move: Despite the Biomet deal, this leading orthopedics stock has decisively underperformed its competitors through the first eight months of the year.

Even with Zimmer offering up only average gains in 2014, shareholders have plenty to look forward to in the future. Between synergies and negotiating leverage on the way courtesy of the Biomet acquisition to the optimistic future of the orthopedics market in up-and-coming markets in Asia, here are three top reasons why Zimmer's stock could be the long-term winner your portfolio needs.

Biomet's acquisition means big possibilities

Zimmer's deal to bring Biomet into the fold propels this company into the highest tier of medical device corporations. Together, Zimmer and Biomet are poised to emerge as the second-largest orthopedics device manufacturer by sales behind only Johnson & Johnson. The synergies from this acquisition alone are a major dose of optimism for investors wanting more from this stock.

The company's leadership expects the Biomet acquisition to add up to $1.25 in per-share earnings in 2015 alone, but the long-term projection could be even greater. Zimmer foresees cost savings of up to $270 million through 2017. Company management also expects to experience less of a burden from the Affordable Care Act's medical device tax on revenue, allowing Zimmer to invest more in new technologies and capturing market share as the device industry consolidates.

Zimmer still needs to clear a few regulatory hurdles, but Biomet's inclusion will help open up the company's product offerings by bringing in more punch to up-and-coming industries such as trauma and sports medicine. Biomet and Zimmer are the fourth- and fifth-largest trauma device manufacturers in the U.S. by revenue, and together the two companies will vie for a major piece of a domestic market expected to grow to more than $8 billion annually by 2020.

That consolidation should help in more than just market share as well – particularly as cash-strapped hospitals negotiate for the best prices in the coming future.

Increasing negotiating leverage

Hospitals today are facing tighter budgets and less financial maneuvering, putting pricing pressure on device makers. The consolidation wave in the industry has led to the largest corporations holding all the negotiating leverage – and Zimmer's beefing up with the Biomet acquisition should only help this company in future sales to hospitals and healthcare payers across the country.

Consolidation has swept across hospital chains as well and led to the price pressure in the U.S. as of late – but the addition of Biomet's portfolio of trauma, sports medicine, and other products should help Zimmer in its sales. That product breadth will give Zimmer an advantage over more focused rivals in negotiations with payers, offering bundles of products in a move that could give the company a leg up in commanding domestic medical device market share.

But the U.S. isn't the only major market Zimmer has its eyes on. More and more, it's emerging markets – especially in Asia – that may hold the key to this device giant's best hopes for future growth.

Overseas opportunity abounds

Developing economies such as China and India have become the hot market in healthcare, and orthopedics is no exception. Orthopedics devices are estimated to grow by 17% annually through the next two years in China, with overall healthcare spending projected to pick up by 14% over the next five years, according to accounting firm Deloitte. India's healthcare spending is projected to grow by 17% over that time.

Zimmer, along with other top orthopedics device companies, have been quick to capitalize on this trend. The corporation snapped up China's Beijing Montagne Medical Device Co. back in 2010 to beef up its presence overseas, competing with similar acquisitions from top rivals like Stryker as of late. Zimmer has already begun to reap the benefits, with double-digit sales growth from its extremity reconstructive division and its trauma device group in its most recently reported quarter.

Cloudier regulatory rules in developing economies and up-and-coming domestic competition won't make Zimmer's path easy overseas, but Asia's growth potential – and increasingly aging populations in major economies such as China and Japan – should only benefit orthopedics giants like Zimmer in the future.

A brighter future to come?

Zimmer's stock hasn't quite lived up to its competition in 2014, but the company's acquisition of Biomet has dug up a number of bright possibilities for this orthopedics giant. With the synergies and cost savings of the deal, Zimmer will be poised to capitalize on its newfound spot as the U.S.'s second-largest orthopedic device maker by revenue – and thrive in negotiating for sales with increasingly budget-conscious hospitals and healthcare payers, as well. Meanwhile, emerging economics, particularly in the Asia-Pacific region, offer long-term growth potential across the industry as populations age and developing middle classes expand.

Keep an eye on Zimmer going forward: Biomet's acquisition could just be the start of something special for this powerhouse orthopedics leader.

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Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Zimmer Holdings. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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