ZBH - Zimmer Biomet Holdings

[Cigarbutt]

This company is about potential favorable industry dynamics going forward with reasonable capacity to maintain/increase moat.

Link:

http://www.cbc.ca/news/politics/2016-census-age-gender-1.4095360

Demographics in USA is similar.

I you combine demographics with products that ZBH sells (a lot has to do with hip and knee replacement parts), you get (see assumptions) an expanding market (mostly an oligopoly). ZBH is a market leader and has shown a consistent trend in its capacity to maintain/increase moat.

Assumptions:

-procedures where their products are used are life changing (pain and limitations) but not life saving, so there may be pressures to reduce access.

-healthcare may become, over time, a victim of cost controls (government, insurance).

-eventually new technologies may make implants obsolete (no significant visible entrant now).

 

For disclosure, I don't see this as an investment now because of what I consider to be a stratospheric PE (adjusted).

Entry point counts.

Interesting to note that, retrospectively, the return obtained without regard to timing, would have resulted in market returns + some more.

Doing the same retrospective evaluation and investing in periods of general distress would have resulted in Buffett-type returns.

Going forward, if your time horizon is very long and entry point is less important, expected results are likely to be satisfactory.

It's on my watch list.

[sys]

I don't see this as an investment now because of what I consider to be a stratospheric PE (adjusted).

 

2017 guidance is for eps of ca. $8.5, no?  what am i missing?

[netnet]

 

Doing the same retrospective evaluation and investing in periods of general distress would have resulted in Buffett-type returns.

Going forward, if your time horizon is very long and entry point is less important, expected results are likely to be satisfactory.

huh ???

The BRK, Nasdaq and S&P have beaten this out over 1,2 and 10 year periods. It has only bested the S&P 500 over 5 year period or if you had bought in 2001.

 

If you had bought in 2004, you would have been making 3% compounded.  Sorry, but that is hardly Buffett like nor really satisfactory. Plus the draw down were brutal. It did go on a tear from 2001 to 2004 though. ;)

[Cigarbutt]

So,

1-ZBH is fairly valued based on guidance?

2-ZBH return has not been satisfactory?

 

1-

I don't usually rely on guidance + look at something like ZBH with a very long term view. Static PE measures or one year earnings guidance have little value.

My take implies looking line by line and making adjustments on the income statement with a long term perspective.

I happen to think that the 2015 Biomet acquisition (which make numbers somewhat fuzzy) is a good one but not for the reasons mentioned. I estimate that short term "synergies" are unlikely to be significant. The acquisition makes sense in the context of long term market dominance (moat) ie the financial impact will occur over time. So, this lack of short term concern (maybe a bias) may cause me to think falsely that "normalized" earnings are much lower than what is reported for 2016 and what is expected for 2017. By the way, adjustments that I make on the income statement occur above the operating margin and below. But I may be too conservative. Value bias. I tend to make a lot of errors of omission. I use the investment scorecard principle. At least, that's the way I see it now.

So, my take is that, over the long term, there will be a net negative effect on the profitability of ZBH versus prevailing conditions. Despite that, on a relative basis, ZBH is likely to give a satisfactory return over the long haul.

 

2-

ZBH was founded in 1927 selling aluminum splints. The firm became a precursor and a leader of joint replacement products in the 1950's. It was spun off in 2001.

 

Sales 1960      4 millions

Sales 1970  27.2 millions

Sales 2001  1179 millions

Sales 2016  7684 millions

 

In the last 10 to 15 years, my opinion is that management have taken the right strategic steps to maintain/increase moat over time (selective acquisitions and astute R+D).

 

Talk about enduring. The CAGR of sales long term is 13 to 15%. Profitable growth over the long term grabs my attention.

When I look at returns, I usually look at 5 years and more. Your numbers may be more accurate than mine but here's what I get. Approximations and dividends excluded. ZBH started a dividend in 2014.

ZBH vs S/P over last 5 and 10 years: comparable

ZBH vs S/P since spin off: 300% vs 100%

By the way, this was on my watchlist in 2008-9. Did not pull the trigger. Most (not all) of others that I chose did better but, if one had chosen ZBH then, the CAGR would have been 15-20%.  I submit that even Mr. Buffett would consider that acceptable.

 

[rb]

Anyone else looking at this? They've delevered quite a bit over the past few years and it's getting spanked pretty well.

[Spekulatius]

Anyone else looking at this? They've delevered quite a bit over the past few years and it's getting spanked pretty well.

 

Yes, I started to look at it. it looks pretty cheap, I looked back at how their business performed in 2008/09 and it wasn’t too bad. Their balance sheet looked better than it is now and they bought back a lot of stock in 2009.

 

They did delever a lot since the Biometric acquisition, so I think they should be OK. Their numbers this years won’t look pretty, but I can see this business bouncing back very quickly.

[Cigarbutt]

^Spekulatius,

Is there a stock that you haven't "looked at"? Like on the Zimbabwe or Mongolian stock exchange? How do you do it? I just follow a few stocks and I sometimes find it overwhelming.  :)

 

I follow Zimmer and plan to look at it again more deeply, depending on the unfolding events.

For the time being, I just want to add a comment that has political ramifications... 'cause it's relevant. In another life, I have been, at times, peripherally involved with negotiations between Zimmer and the like (sellers) and the buyers. I found out that there were two (perhaps more than two) price lists, one for Canada and one for the US and there was no economic link between the two. All that to say that satisfying a growing list of unsecured creditors with free care may impact the bottom line, especially since the propensity to implant Zimmer products in the US is off the chart in comparison to all other developed countries.

[rb]

You may be biased because of your personal experience. There's always two price lists on anything healthcare.

 

I've always liked the medical devices/implants space. There's good demographics and there's big switching costs. The other players in the space are still priced in the stratosphere. ZBH is the only one that seems reasonable. I've passed on it in the  past because of the leverage. But they've done well to bring it down over the past years. They didn't do an acquisition and then go a debt infused buyback binge.

 

The only reason i can think why it's selling more than the other guys is because the leverage is a bit on the high end.

[Spekulatius]

^Spekulatius,

Is there a stock that you haven't "looked at"? Like on the Zimbabwe or Mongolian stock exchange? How do you do it? I just follow a few stocks and I sometimes find it overwhelming.  :)

 

I follow Zimmer and plan to look at it again more deeply, depending on the unfolding events.

For the time being, I just want to add a comment that has political ramifications... 'cause it's relevant. In another life, I have been, at times, peripherally involved with negotiations between Zimmer and the like (sellers) and the buyers. I found out that there were two (perhaps more than two) price lists, one for Canada and one for the US and there was no economic link between the two. All that to say that satisfying a growing list of unsecured creditors with free care may impact the bottom line, especially since the propensity to implant Zimmer products in the US is off the chart in comparison to all other developed countries.

 

Yes, I have looked at an owned too many stocks. I remember this when it was spun off from BMY, but never owned it unfortunately. This is a pretty good business though. Cigarbutt is correct, that things like hip implants gets performed at a much higher in the US than elsewhere (Germany example). Still, if things don’t change too much, I feel this business should continue to do well although I think people were surprised in a past that some of thr must do procedures that  ZMH is involved with in terms of devices have been considered somewhat elective in times of a recession. The valuation looks quite enticing and reflects some economic risk.

[Edward]

I am wondering why Operating income remained flat for 10 years despite doubling revenues.

[rb]

They've had some trouble integrating the sales teams after the acquisition. I've got the feeling they've worked it out by now. Also unlike pharma there was price pressure on the products. Selling prices went down.

 

They also have a pretty big intangible amortization. FCF is higher than income.