Over the past six months, Zimmer Biomet’s shares (currently trading at $86.64) have posted a disappointing 6.2% loss, well below the S&P 500’s 9.6% gain. This might have investors contemplating their next move.
Is now the time to buy Zimmer Biomet, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Zimmer Biomet Not Exciting?
Despite the more favorable entry price, we're cautious about Zimmer Biomet. Here are three reasons you should be careful with ZBH and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Zimmer Biomet’s 4.5% annualized revenue growth over the last five years was mediocre. This was below our standard for the healthcare sector.
2. Free Cash Flow Margin Dropping
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.
As you can see below, Zimmer Biomet’s margin dropped by 1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Zimmer Biomet’s free cash flow margin for the trailing 12 months was 15.1%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? 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 4.2%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
Zimmer Biomet isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 10.4× forward P/E (or $86.64 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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