Biomet has a stellar, 15-year history of double-digit growth. Since 1991, sales have grown 16% annually, while earnings have advanced 17% over that time frame. But growth has slowed as of late. Recently released first-quarter results were no exception.
For the quarter, net sales grew only 5%, and operating income increased only 2%. The company frequently repurchases its stock, so diluted earnings advanced about 5% on a reported basis but jumped 10% when taking into account the fact that financials from last year didn't include expenses for stock options.
In similar fashion to results from earlier this year, at least Biomet is still growing. Things could be worse if sales or earnings were falling. But that's little consolation to investors who have become accustomed to more than 15% growth each year. Spinal product sales didn't meet management expectations and fixation sales fell, causing sales to miss analyst projections. Reconstructive sales, on the other hand, were detailed as strong -- a good thing, as they form the bulk of Biomet's sales.
For Fools not very familiar with this company, Biomet is a medical device firm that designs, manufactures, and sells "musculoskeletal" products in four key categories. The first and largest made up 68% of last year's $2 billion in sales and consists of reconstructive products, such as those to replace aging or injured hip, knee, and shoulder joints, to name a few. Fixation Devices help heal broken bones, while Spinal products fuse and fix spine problems. Each of these segments accounts for just more than 10% of sales each. The Other Products category constitutes just less than 10% of sales and includes smaller procedures, such as arthroscopic surgery items and back/knee brace products.
A company analysis should always include a study of its closest competitors. Biomet's peers include Zimmer Holdings
I find it hard to believe that current growth concerns will be permanent. For Biomet and medical equipment companies, I have more confidence that growth will continue well into the next decade because of the uniqueness of their products and the fact that the number of Americans 65 and older will double by 2050. People in general are also living longer because of advances in nutrition and health care. That means plenty of upcoming joint replacements and surgeries to keep people active and healthy.
Biomet's stellar growth reputation is still intact, but investors are becoming complacent. After reaching almost $50 per share in late 2004, the shares have been stuck under $40 since last April and currently stand at $33.24. The company is looking for a new CEO. Perhaps that will provide the necessary catalyst to revive spinal growth and provide the appropriate leadership in all divisions to capitalize on favorable demographic trends. In any case, the company generates solid cash flow, has little debt, and posts high returns on invested capital. There's also a modest dividend payment as investors patiently wait in the doctor's office for better days ahead.
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Fool contributor Ryan Fuhrmann is long shares of Biomet but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.