Zimmer-Biomet May Not Be Hip Enough

Shares of Zimmer-Biomet (ZBH) fell 14% on Monday after the company lowered its full-year forecast on a weak third-quarter report. The company said it could not supply enough hip and knee replacements.

Third-quarter earnings were $1.79 per share, in line with the consensus estimate. Revenue rose 4% to $1.83 billion.

Management cut full-year fiscal 2016 guidance. The company lowered the top end of its expected earnings range to $7.90 to $7.95, down from $7.90 to $8.00. Management also cut revenue guidance. Revenue is now expected to range from $7.63 billion to $7.65 billion, vs. the previous estimate of $7.68 billion to $7.715 billion. The consensus was looking for revenue of $7.7 billion.

Management said foreign currency translation would decrease revenue by approximately 0.3%. Revenue growth is expected to range from 1.65% to 1.90% for the full year, vs. the previous range of 2.5% to 3%.

On the call, the company said it was not able to supply enough hip and knee replacements. The supply shortfall caused orthopedic surgeons to use other brands of joint replacement products. The company could not supply enough of the Persona knee instrument set. Zimmer-Biomet also ran out of the popular Arcos hip replacement and the popular G7 hip.

On Sept. 9, I said investors should sell shares into the runup. Insiders were heavy sellers, and I recommended that investors should take profits.

With this decline, Zimmer Biomet is at a valuation low. Including the reduced guidance, the stock is only trading at 13 times 2016 estimates of $7.92 per share.

Unless there was an unexpected rush on hip and knee replacements, I'm not entirely sure why the company had so little inventory of such important products. Hip and knee replacements take months to manufacture, not weeks, so the company could have supply problems throughout the first half of next year.

I would avoid shares of Zimmer Biomet for the time being.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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