Biomet to Get New Legs

The most successful and reliable stocks on the board -- the ones with 10-year returns of better than 1,000% -- rarely come into their 200-week moving averages. They rarely even come into their 52-week moving averages. They might occasionally stumble for a few weeks or months, but after a decade of outperformance, they generally are so loved by institutional investors, they get picked up well before selling gets way out of hand.

So when a major long-term winner drops down to four-year support, it is an event that calls for the attention of value-oriented investors. And that's the situation now for shares of orthopedic products manufacturer Biomet (BMET - commentary - Cramer's Take).

From 1990 through the end of last year, Biomet was a very hip company. Shares rose 1,500% amid a surge in demand for its proprietary joint and spine reconstruction products, as well as its new knee-replacement systems that permit minimally invasive procedures. For years, Biomet posted 15% to 20% growth in earnings and revenue, margins north of 70% and returns on invested capital of 18%. It has controlled costs and raised prices despite a steady increase in competition.

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Biomet Matches Estimates

But sometimes great internal results are not enough to satisfy investors who want more growth every year, and companies are encouraged to make acquisitions. Biomet was not immune to this urge, and one of its oldest purchases has gotten it in trouble. In the past six months, shares have fallen to $35 from a high of $49 as weak results in its secondary divisions have pulled down the strong results of its core lines. On Tuesday, shares sank to a two-year low following a preannouncement of a fiscal fourth-quarter earnings shortfall.

Consensus expectations were for Biomet to earn 44 cents a share on $521 million in revenue, but the company said instead it will produce 40 cents to 42 cents a share on $503 million in sales. Orthopedic implant sales seemed fine, and knee sales are going pretty well. The problem was at its EBI division, which primarily makes electrical bone-growth stimulation products. To show investors that it wouldn't tolerate the division's repeated underperformance any longer, Biomet said it had replaced the longtime head of its EBI unit, as well as its sales vice president.

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Jon Markman, writer of TheStreet.com Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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