Zimmer Holdings (ZMH) has an exposure of about 75% to the hip and knee market in orthopedics, one of the core medical device markets that has been edging higher, and the company’s manufacturing capacity and its expansion plans in emerging markets make the company one of the favorites of Matt Miksic, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“As I mentioned, they are one of the companies that has tightened down the screws and taken a lot of cost out of their fixed assets and manufacturing processes over the past four years as volumes have slowed. I think as volumes increase, we’re going to see a continued benefit there, maybe 8% or 9% free cash flow yield and total return of over 11% against comparables of maybe 8% to 10%. We think it’s got a long way to go. We also think we’re still in the early stages of this orthopedic return to growth,” Miksic said.
Miksic says Zimmer has been making investments in emerging markets, and ZMH‘s hip and knee products are expected to continue being increasingly adopted in geographies such as China and India.
“I think Zimmer, for example, will develop a model where they may market NexGen, their current knee system, more heavily into emerging markets, whereas they’ll continue to try to penetrate developed markets with their forthcoming launch, Persona. That may be their strategy,” Miksic said.
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