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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