After years of rapid-fire growth,
has paused to catch its breath.
The giant orthopedic device maker saw revenue climb just 6% -- and profits remain flat -- during the latest quarter. Excluding special items, however, the company managed to beat Wall Street expectations. It also raised its outlook for the current year.
Nevertheless, Zimmer's stock fell 1.5% to $68.84 in after-hours trading following the report.
Zimmer's fourth-quarter sales of $848 million matched the consensus estimate exactly. However, sales of the company's core products -- artificial hips and knees -- grew at a much slower clip than they once did. Sales of both products increased by 9% overall, and just 8% in the important U.S. market, on a constant-currency basis.
Net income, hurt by acquisition-related expenses, came in essentially flat at $200 million. However, operating profits jumped 21% to 86 cents a share -- 3 cents above analyst expectations.
The company also raised its 2006 profit guidance to between $3.62 and $3.68 a share. Wall Street had been forecasting full-year profits of $3.60 instead.
In the meantime, Zimmer CEO Ray Elliott applauded the company's latest performance.
"In 2005," he said, "we continued to deliver on our core strategies of value-added education, innovative investment and flawless execution, resulting in excellent earnings growth while overcoming moderating foreign currency and price environments."
Before reporting its own results, Zimmer took a big bounce last week on bullish comments from a competing -- but more diversified -- player in the orthopedics space.
delighted the market on Friday with promises to grow 2006 profits by more than 20% despite falling prices for artificial hips and knees.
By then, Harris Nesbitt analyst Joanne Wuensch was already forecasting solid growth for Zimmer as well. Wuensch predicted that Zimmer would beat Wall Street estimates and, therefore, reiterated her outperform recommendation on the stock ahead of the company's fourth-quarter report.
"Revenue is expected to be weighed down by the negative impacts of foreign exchange, the Gulf Coast hurricanes and one fewer billing day," Wuensch acknowledged. But "despite this, we believe that the company's considerable operating leverage should allow it to deliver healthy bottom-line results, with earnings growth in the high teens."
Bernstein analyst Bruce Nudell followed up on Monday with some upbeat comments of his own. He even raised his price target on Zimmer's stock despite ongoing concerns about orthopedic pricing in the crucial U.S. market.
He cited the company's strong cash flow as a reason for his positive view.
"Both the (discounted cash flow) and relative valuation analyses suggest that Zimmer should advance towards $80 over the coming year," he wrote. "Further, the DCF analysis suggests limited downside risk to the economic value of the stock, even if the near-term (pricing) environment for hips and knees is slightly worse than we've modeled."
For now, at least, Nudell has maintained his market-perform rating on the company's shares. He said he would buy the stock, however, if it falls to $67 or below.
Meanwhile, Bear Stearns analyst Milton Hsu found himself rethinking -- and ultimately upgrading -- Stryker after the company's recent update. He pointed to Stryker's diversified business model, which includes a booming medical/surgical equipment division, as the reason.
"Considering the uncertainties around how protracted the downturn in worldwide recon growth could be, we think Stryker is the best positioned ortho player to manage through this period," wrote Hsu, who now has an outperform rating on the company's stock. "Looking at Stryker as a diversified medical device company with significant emphasis in ortho, rather than a pure-play ortho company with a sleepy capital equipment business, may be a more accurate way to evaluate the Stryker story."
Certainly, Stryker itself has been pushing this view. During its conference call Friday, Stryker repeatedly urged investors to examine the company's overall results instead of focusing on orthopedic implants in particular.
To be sure, Stryker still counts its orthopedic division as its largest business by far. However, the company also operates a big medical/surgical unit that now generates more than one-third of its total sales and contributes heavily to its bottom-line results.
Even so, Stryker has so far failed to distract those who remain focused on the company's core reconstructive joint business.
"I know you are looking for med-surg questions," one analyst acknowledged on Friday. "But I'm afraid I have another recon-related question."
The analyst would go on to ask about price cuts in Japan, a concern that first spooked investors back in the fall. In response, Stryker offered both good news and bad. The company indicated that Japan will probably lower its payments for orthopedic implants by about 6% -- instead of up to 10% -- in 2006. However, the company is now expecting a bigger cut to follow in 2007.
Meanwhile, Stryker continues to face pricing pressures in its most important market of all.
"The implant pricing in the U.S. was still slightly negative in the quarter but offset by the rest of our business," Stryker CEO Stephen MacMillan said on Friday. But "when we think about pricing, we think about it across the total business. And you know, we were pleased to see a modest rebound" overall.
CFO Dean Bergy echoed that optimistic view.
"We're a total company here, and we have to look at the total company pricing," Bergy said. "I think we feel like (reconstructive) pricing is probably not going to be quite as good as it was but still not going to be something to -- as Steve said -- slit your wrists over."
Still, a big government probe could be causing some additional pain.
Last year, the Department of Justice began investigating the financial ties between several orthopedic device makers -- including Stryker -- and the brand-loyal surgeons who insist on using their products. The government is trying to determine whether the companies have improperly rewarded physicians for using expensive implants for which others had to pay. The companies themselves have denied any wrongdoing.
During Stryker's recent conference call, however, a First Albany analyst suggested that the feds had "stepped up their investigation and are starting to subpoena surgeons" now. Nudell focused on this same topic -- and its potential threat to the industry -- in his latest Zimmer report as well.
"We have shown that 10% of U.S. orthopedic surgeons perform 50% of cases," Nudell noted on Monday. And "it could be that these surgeons will be targeted in ongoing OIG (Office of Inspector General) investigations into orthopedic selling practices, with associated headline risk and the potential for shifting added bargaining power to providers and away from manufacturers."
For its part, Stryker has offered some reassurance to investors in the meantime.
"We don't really know where the U.S. attorney in New Jersey will fully go with this," MacMillan admitted on Friday. "But I would tell you, we feel very good about our compliance program and feel really good about the approach we have taken to this issue over time -- and are hopeful (about) the way it will ultimately play out."