Why Zimmer Holdings Inc. Shares Skyrocketed

Zimmer shares soar after reporting its first-quarter results and announcing a major acquisition. Can this purchase fuel shares even higher or should investors take their gains and leave?

Sean Williams
Sean Williams
Apr 24, 2014 at 1:48PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zimmer Holdings (UNKNOWN:ZMH.DL), a developer and marketer of orthopedic and implantable surgical devices, surged as much as 18% after announcing the acquisition of privately held Biomet and reporting its first-quarter earnings results.

So what: The really big news is Zimmer's announcement that it's buying Biomet for $13.35 billion, continuing a week where we've seen some incredible deals offered and announced in the health-care space. According to Zimmer, the deal will be accretive to Zimmer's bottom line within the first year and it should generate $270 million in annual cost savings by the third year. Mainly, though, the company's larger size should help boost its pricing power and give it better product diversity, something needed in an environment where Medicare reimbursement rates are falling.

The other half of Zimmer's big day includes its first-quarter earnings release, which highlighted a 2% increase in revenue to $1.16 billion, a 6% increase in adjusted EPS to $1.50, and a reaffirmation of its previous full-year guidance of 2.5%-4.5% revenue growth including negative foreign currency effects and adjusted EPS of $6-$6.20.

Now what: Today's move is entirely about Zimmer being aggressive and buying its way to better pricing leverage, which Wall Street and investors clearly seem to like. There are obvious margin benefits to the deal that should help the combined company deal with slow but steady decreases in Medicare reimbursement rates. Furthermore, at only 15 times forward earnings and with a fresh infusion of products and higher projected margins, there could still be additional upside left in Zimmer's shares. I'd suggest health-care savvy investors dig bit deeper into this medical device maker.