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Katz: Two Names Continue to Impress

The other area of disappointment was modest market share lose in the U.S. for knee and hip products (the company's market share was stable internationally). While I never like to see short-term share slippage, I am very confident in the company's product lines and believe that, over time, it will be able to maintain market share, which is at a very healthy 20% to 25% range.

Earlier this year the company initiated its first dividend, which stands at 1.2%. I expect the dividend to show nice growth. The company has an "A+" investment-grade credit rating with a balance sheet that is close to net debt free. For the past decade, Zimmer has consistently grown revenues by 14% per year and earnings by 15% per year. Although Zimmer's growth rate has slowed in recent years due to the macro industry headwinds of reduced procedure growth and downward pressure on prices, I expect Zimmer to report 3% to 5% revenue growth per year and 8% to 10% earnings growth due to continued modest industry growth, further emerging market penetration and aggressive share repurchase programs.

As discussed in April, shareholders might get lucky with a takeover of the company, as it has very attractive attributes that should appeal to a larger healthcare player.

Take advantage of the recent stock decline, which was driven by the modest revenue miss, concerns over share loss in the U.S. knee and hip markets and a conservative top-line outlook. ZMH's market valuation is very attractive relative to the company's current and long-term earnings power and cash flow.

At the time of publication, Katz was long PEP and ZMH.

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