Zimmer Biomet (ZBH)

Medical device company Zimmer Biomet (NYSE:ZBH) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 1.1% year on year to $1.91 billion. Its non-GAAP profit of $1.81 per share was 2.3% above analysts’ consensus estimates.

Company Overview

With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE:ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.

The surgical equipment and consumables industry provides tools, devices, and disposable products essential for surgeries and medical procedures. These companies therefore benefit from relatively consistent demand, driven by the ongoing need for medical interventions, recurring revenue from consumables, and long-term contracts with hospitals and healthcare providers. However, the high costs of R&D and regulatory compliance, coupled with intense competition and pricing pressures from cost-conscious customers, can constrain profitability. Over the next few years, tailwinds include aging populations, which tend to need surgical interventions at higher rates. The increasing integration of AI and robotics into surgical procedures could also create opportunities for differentiation and innovation. However, the industry faces headwinds including potential supply chain vulnerabilities, evolving regulatory requirements, and more widespread efforts to make healthcare less costly.

Zimmer Biomet's main competitors in the orthopedic medical device market include Johnson & Johnson's DePuy Synthes division, Stryker Corporation, and Smith & Nephew plc, all of which compete across similar product categories including joint replacements and surgical technologies.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $7.70 billion in revenue over the past 12 months, Zimmer Biomet has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Zimmer Biomet struggled to consistently increase demand as its $7.70 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a rough starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Zimmer Biomet’s annualized revenue growth of 4.1% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can dig further into the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 4.8% year-on-year growth. Because this number aligns with its normal revenue growth, we can see that Zimmer Biomet has properly hedged its foreign currency exposure.

This quarter, Zimmer Biomet reported modest year-on-year revenue growth of 1.1% but beat Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to grow 3.9% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.

Zimmer Biomet has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 13.5%, higher than the broader healthcare sector.

Looking at the trend in its profitability, Zimmer Biomet’s operating margin rose by 6.9 percentage points over the last five years. Zooming in on its more recent performance, we can see the company’s trajectory is intact as its margin has also increased by 5.4 percentage points on a two-year basis.

This quarter, Zimmer Biomet generated an operating profit margin of 15.3%, up 1.2 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Zimmer Biomet’s EPS grew at an unimpressive 3.5% compounded annual growth rate over the last five years. On the bright side, this performance was better than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

We can take a deeper look into Zimmer Biomet’s earnings to better understand the drivers of its performance. As we mentioned earlier, Zimmer Biomet’s operating margin expanded by 6.9 percentage points over the last five years. On top of that, its share count shrank by 3.3%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Zimmer Biomet reported EPS at $1.81, down from $1.94 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 2.3%. Over the next 12 months, Wall Street expects Zimmer Biomet’s full-year EPS of $7.87 to grow 7.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Zimmer Biomet has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 13.4% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that Zimmer Biomet’s margin expanded by 7.3 percentage points during that time. This is encouraging because it gives the company more optionality.

Zimmer Biomet’s free cash flow clocked in at $338.2 million in Q1, equivalent to a 17.7% margin. This result was good as its margin was 12.9 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Zimmer Biomet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.8%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Zimmer Biomet’s ROIC increased by 2.8 percentage points annually over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Zimmer Biomet reported $1.38 billion of cash and $7.18 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.98 billion of EBITDA over the last 12 months, we view Zimmer Biomet’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $233.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Zimmer Biomet narrowly top analysts’ revenue and EPS expectations this quarter. On the other hand, it lowered its full-year EPS guidance. Overall, this was a softer quarter, but the stock traded up 2.4% to $104.88 immediately following the results.

Updated: May 22, 2025 at 11:50 PM EDT

Before investing in or passing on Zimmer Biomet, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Zimmer Biomet isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue growth was uninspiring over the last five years. And while its rising cash profitability gives it more optionality, the downside is its mediocre ROIC lags the market and is a headwind for its stock price. On top of that, its unimpressive EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.

Zimmer Biomet’s P/E ratio based on the next 12 months is 11.1x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $108.62 on the company (compared to the current share price of $91.58).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.