broke its promise.
The orthopedic device maker has repeatedly assured investors that it could hit its aggressive sales targets for the second half of the year. But on Wednesday, shares fell 3% after the company missed its top-line projections for the third quarter in a row and conceded that it won't hit its full-year sales goals.
"We have been about a quarter behind all year relative to anticipated sales growth rates," admitted Zimmer CEO Ray Elliott. Still, "we are pleased to exceed our earnings guidance even though sales were not as strong as previously forecasted."
Zimmer reported third-quarter income of $183 million, up 9% from a year ago. Operating profits of 77 cents a share topped the consensus estimate by 2 cents.
Still, the company fell short where it usually matters most.
Zimmer had been forecasting double-digit sales growth for both this quarter and next. Instead, third-quarter sales rose just 8% to $820 million, falling a full $10 million shy of Wall Street expectations.
Moreover, the company has lowered its fourth-quarter sales growth guidance as well. The company now expects to report sales of $922 million to $932 million -- up 10% at best -- for the current quarter. Analysts were hoping for fourth-quarter sales of $936 million instead.
Zimmer's stock slid $2.09 to $69 in after-hours trading following the update.
Wachovia analyst Michael Matson saw no room for error. Zimmer's stock, he said earlier this month, "appears priced for a stellar quarter."
Matson personally expected far less.
To hit crucial top-line targets, he noted, Zimmer would have to sell a large - perhaps unrealistic -- number of its new high-end hips to hospitals that have been resisting pricey upgrades. Furthermore, he said, the company's knee sales remain "under siege" by competing products in the meantime.
Thus, Matson warned investors away from Zimmer's stock in anticipation of a shortfall.
"In our view, a revenue miss as small as $5 million might be enough to send the stock down sharply -- and even an in-line quarter might not drive the stock meaningfully higher," he wrote. "With our lingering concern about a revenue miss, we recommend that investors take some profits before ZMH reports its third-quarter results."
Matson has an underperform rating on Zimmer's stock, which he values at $55 to $59 a share. His firm hopes to secure investment banking business from the company over the next three months.
Leerink Swann analyst Jason Wittes sounded worried as well. In a research note on Wednesday, Wittes noted that Zimmer had already fallen short of its top-line guidance every quarter this year. Wittes has a market-perform rating and a $58 price target on Zimmer's stock. His firm has performed non-investment banking services for the company over the past 12 months.
William Blair analyst Ben Andrew looked for Zimmer to please investors instead. He sensed that orthopedic pricing had finally stabilized and that the worst may, in fact, lie behind the company already.
"During the last conference call, CEO Ray Elliott made it clear that he believed Zimmer was at the bottom of the sales cycle and that results should improve beginning in the third quarter following the second quarter's slight disappointment," Andrew reminded. "We expect this to be the case and have modeled top-line growth of 8%. ... This would be the fastest-growth quarter since third quarter of last year."
Andrew predicted that Zimmer would continue to improve its strong margins as well. By now, he noted, the company has approached margin levels that are "nearly unheard of in the medical technology world." As a result, he has started to wonder a bit where future leverage will be found.
"Looking beyond this year, we see this among the most important challenges facing the company," Andrew wrote. "However, in our opinion, with the business apparently now on better footing, the increasing likelihood management will make another acquisition ... and the organization's cash-generating ability, we would recommend share accumulation at these valuation levels."
Andrew has an outperform rating on Zimmer's stock. A member of his research team owns the shares himself.