Zimmer ( ZMH) is on a roll.

The orthopedics device maker ended 2006 with a bang, blowing past fourth-quarter estimates and gathering the momentum necessary for even stronger results this year. The company returned to double-digit sales growth in the latest quarter, with revenue jumping 10% to $934 million and beating the consensus estimate for a change. Net income increased at more than double that rate, rocketing 23% to $245 million. Meanwhile, operating profits of $1.02 a share beat Wall Street targets by 3 cents.

New offerings, such as the Zimmer's Gender Solutions Knee for women, helped out plenty.

"During the year," CEO Ray Elliott said, "we experienced a tremendous flow of new products and reached a Zimmer record 24% of sales from new products -- including $229 million in the fourth quarter" alone.

Going forward, Zimmer fully expects that momentum to continue. The company is now projecting revenue of $3.85 billion and profits of $3.95 a share for the coming year. Wall Street was anticipating just $3.81 billion in revenue and $3.90 in profits from the company instead.

Zimmer's stock bounced 1.1% to a new 52-week high of $81 a share in after-hours trading following the company's upbeat report.

High Hopes

William Blair analyst Ben Andrew was looking for good news from the company.

Just ahead of Monday's update, Andrew predicted that Zimmer would beat top-line projections while matching bottom-line estimates for the period. Importantly, he looked for signs of improvement in the company's core joint-reconstruction business.

"We expect Zimmer to deliver a solid quarter this evening, riding the gradual recovery trend of the orthopedic industry that we saw in the third quarter and continued uptake of new products," Andrew wrote on Monday. "The company encountered some instrument set shortage issues with its newly launched metal-on-metal hip and Gender Solutions Knee last quarter -- due to surprisingly strong demand -- and we expect these have been resolved and the products are now fully launched in the United States."

Andrew estimated that Zimmer saw hip sales grow by 7.8% and knee sales jump by an even stronger 9.4% in the final quarter of last year. He figured that pricing wound up "flat or marginally positive" in 2006 -- better than he had feared -- but he predicted ongoing challenges ahead.

"We believe there will be steady -- but not unmanageable -- reimbursement pressure in the United States, while Europe and Japan should see outright cuts in 2007," Andrew wrote. "This is especially true for Japan, where another scheduled price reduction took effect on January 1, 2007, and we understand a second cut will be made in April."

Besides product launches and pricing pressures, Andrew believes, investors remain keenly focused on upcoming management changes at the company. Elliott has announced plans to retire from the executive suite during the first half of this year, although he will continue to serve as chairman for some time after that. So far, the company has given no indication of who his replacement might be.

Andrew, for one, wonders.

"With Mr. Elliott's departure, there is a bit of a power vacuum at Zimmer," he notes, "as investors have had minimal exposure to other senior management at the company."

Still, Andrew feels good about Zimmer nonetheless. He has an outperform rating on the company's stock. His colleague, fellow analyst Brian Weinstein, owns the shares himself.

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