Zimmer ( ZMH) is testing its flexibility even sooner than some people had anticipated. The giant orthopedic device maker proved on Wednesday that it can weather a slowdown in sales growth and still beat the high profit targets set by Wall Street. The company posted third-quarter sales of $763 million -- up just 9% from a year ago -- that clearly fell short of the $779 million consensus estimate. But operating profits of 70 cents a share beat expectations by 3 cents. "Similar to the market overall, sales results were mixed, with hip and knee sales delivering slower growth, offset by solid performances in spine, dental and trauma," Zimmer CEO Ray Elliott stated. "Our highly leveraged earnings performance demonstrates the strength of Zimmer's business model, which is designed to capitalize on our position as the low-cost producer and distributor while delivering quality earnings on every new sales dollar under a variety of market conditions." Still, many had anticipated that Zimmer's double-digit sales growth would at least hold up a little longer. Instead, pricing pressures on the company's core orthopedic division -- where sales grew just 10% in the quarter -- went ahead and dragged the top line down. Even so, Zimmer sees no real hit to the company's bottom line for now. It reaffirmed full-year guidance of $3.07 a share, exactly in line with Wall Street expectations. It also issued new 2006 guidance of between $3.58 and $3.65, against the $3.64 consensus estimate. Skittish orthopedic investors reacted with relief. After pressuring the stock for weeks, they pushed it up 1.9% to $65 a share in after-hours trading.
Baird analyst Suey Wong had actually been forecasting a slight third-quarter miss. Still, Wong assumed that Zimmer would continue to grow sales at a double-digit clip at least for the time being. He based his forecast on an expected 12% increase in third-quarter sales of orthopedic devices -- which account for more than 80% of the company's business -- with high-margin knees once again leading the way. And he concluded that the company would manage to grow its already strong gross margin overall.