Investors in orthopedics device maker Zimmer Holdings (NYSE: ZMH) haven't been in much of a celebratory mood lately. Shares of the medical device giant have hit a slide late in 2014, with the stock falling nearly 3% over the past three months, victim of a broader fall among leading med tech stocks despite optimism remaining high around Zimmer's April acquisition of competing device maker Biomet in a monster $13.4 billion deal. However, the company had a chance to turn around its sliding shares with a solid third-quarter showing on Thursday morning -- and a strong performance shows that despite the stock's slide, this healthcare mainstay is still doing well.
Overseas success powers an earnings beat
Zimmer's done a good job beating quarterly estimates over the past year, and the trend didn't stop with 2014's third quarter. The company posted diluted earnings per share of $1.35, good enough for year-over-year growth of 8%, and topping the average $1.30 estimate analysts had projected -- although that number had fallen lately from an earlier quarterly EPS projection of $1.36. Fortunately for investors, Zimmer came through on its top line as well, just narrowly pushing past revenue estimates with $1.11 billion in sales for the quarter that amounted to around a 3% gain over the past year's third-quarter result. That was enough for the healthcare leader to project full-year adjusted EPS guidance of $6.05, right in line with an earlier estimated range of between $6 and $6.10 for the full year.
The company's reconstructive device division, responsible for the significant majority of Zimmer's revenue, headlined the third quarter's growth. Knee products saw a 6% year-over-year gain in sales, powering an overall 4% jump in reconstructive revenue that was weighed down slightly by flat hip product revenue from the Americas.
It's internationally where Zimmer's thriving in this business, however: European knee device revenue soared, vaulting higher by 10% for the quarter, while hip product sales in the Asia-Pacific region jumped by 10% at a constant currency, a strong showing even with a slight hit due to currency issues. In all, the two regions each contributed 6% operational sales growth for the quarter. It's a validating success for the company's overseas efforts, particularly in Asia, where medical tech is poised for big gains in coming years. The orthopedic device market is expected to grow by 17% over the next two years in China, and Zimmer is well-positioned to keep up the pace across the Pacific.
Will Biomet shore up Zimmer's slower-growing units?
Despite the strong outing in the third quarter, Zimmer's results weren't all rosy. The company's performance in the Americas is in need of a boost, particularly in its reconstructive hip unit, where revenue has fallen 1% year over year over the past nine months. Even with Zimmer's international success, sales from the Americas still make up more than 55% of the company's overall revenue.
The pending Biomet acquisition, however, should help beef up that performance. Should regulators approve the deal, Zimmer would emerge as the market's second-largest orthopedics device maker, trailing only powerhouse Johnson & Johnson in revenue. That would give the company added leverage in negotiating with hospitals in today's budget-conscious healthcare environment -- although even with that boost, expect the fast-rising Asia market to continue to be Zimmer's best opportunity for consistent growth in the coming years.
The Biomet deal should also add some needed muscle to some of Zimmer's smaller divisions, however. The company's extremity business managed 3% operational sales growth this quarter, but Zimmer's trauma group saw revenue fall by 1% year over year -- a setback despite a 1% uptick in the unit's sales growth over the past nine months. Biomet's a major player in both markets, and adding the company to its ranks should help Zimmer reduce its dependence on reconstructive revenue.
European Union regulators still need to come to a decision on that deal after launching a probe of the agreement, however -- and the European Commission has inked a deadline in mid-March to rule on Zimmer's move. With the company's attempt to bring Biomet into the fold only adding to the healthcare sector's consolidation wave in 2014, it wouldn't be a surprise to see Zimmer sell off an asset or two in order to win over regulators.
Until then, Zimmer's third quarter proves that this company's core business is still standing on solid ground -- even if this stock has fallen into the market's recent slump. If Zimmer can keep up its strong reconstructive sales growth, particularly in Asia and Europe, and in its knee business, this stock will be in a prime position for long-term gains.