In Tuesday’s trading, 24 NYSE stocks hit new 52-week highs, and 15 hit new 52-week lows. On the Nasdaq, the news wasn’t so pretty, with 88 stocks hitting new 52-week lows, 6.3x those hitting new 52-week highs.
Among the 15 NYSE stocks hitting new 52-week lows, Zimmer Biomet (ZBH), a maker of orthopedic-related medical devices, hit its 34th of the past 12 months.
Its shares are down over 20% in the past year and 15% over the past five years. If you’re a long-time shareholder, the stock’s performance has not been good in recent years.
Of the 15 hitting new 52-week lows, ZBH has by far the highest share price. Its stock trades at less than 12x the analyst 2025 EPS estimate of $8.22.
Admittedly, I’ve not followed the company’s financial performance closely in recent years, but one thing is for sure: it’s struggled to generate organic growth.
While ZBH stock appears to be a value play, there is definitely an argument to be made that it’s a value trap, much like Pfizer, whose stock has lost 36% over the past five years.
In Pfizer’s defense, it does have a robust 7.7% dividend yield to lessen the pain, 7x Zimmer Biomet’s.
ZBH stock is probably not for you if you're a dividend-focused investor. However, if you lean toward value stocks, it might be. Here’s why.
Zimmer Biomet Isn’t Going Out of Business
Between 2020 and 2024, the company’s CAGR (compound annual growth rate) for revenues is 2.3%, from $7.02 billion in 2020 to $7.68 billion in 2024.
That kind of growth won’t get you above-average price-to-sales multiples. However, there’s a wrinkle to these numbers.
Zimmer Biomet spun off its spine and dental business as ZimVie (ZIMV) on March 1, 2022. In fiscal 2020 and 2021, ZimVie had sales of $897 million and $1.0 billion, respectively.
If you exclude these sales from its results, its CAGR between 2020 and 2024 increases to 5.8%. That’s still nothing to write home about, but double what it was with its former spine and dental businesses.
The company initially distributed 80.3% of the shares in ZimVie to its shareholders, who received one ZIMV share for every 10 held in the parent. Zimmer Biomet received $541 million from ZimVie for the assets transferred to its balance sheet, while retaining 5.1 million shares (19.7%) of ZIMV stock. It disposed of the shares in February 2023, for a slight loss.
Over the next three fiscal years, Zimmer Biomet expects to grow revenues by an average of 3.9%.
In its January presentation, the company said the following about its long-range plan (LRP):
“We remain committed to our LRP ambitions of driving mid-single digit revenue growth with EPS leverage at 1.5X revenue and FCF growing 100 bps faster than
EPS. We will return 65% of FCF to shareholders while leaving ample firepower to drive responsible M&A.”
The company plans to expand beyond its core orthopedics market into higher-growth businesses.
At the end of January, Zimmer Biomet announced the acquisition of Paragon 28, a foot and ankle orthopedics specialist. It is paying $1.2 billion for the Colorado-based company. Once completed, its S.E.T. (Sports Medicine, Extremities, Trauma) segment will generate more revenue than its Hip segment.
In 2024, its adjusted profit was $1.6 billion, or nearly 21% of its annual revenue. As the subheading states, it isn’t going out of business anytime soon.
The Play to Make
While it’s never guaranteed that acquisitions will reignite growth, the move to diversify beyond its core markets makes sense.
Growing its top-line revenue at mid-single digits is very doable. Combined with the fact that its P/S ratio of 3.53 is lower than it’s been in the past decade, and its price-to-earnings ratio of 23.8 is lower than it’s been since 2019, the company would really have to stumble for the share price not to move higher in the next 12-24 months.
As I write about options often, I’m always looking for a way to incorporate them into a buying strategy. Given that its five-year high is $180.36 (April 1, 2021), I will suggest two possibilities.
The first is the Jan. 15/2027 $145 call that’s well out-of-the-money. The latest ask price is $4.30, or less than 5% of its share price. The only downside: you probably won’t get any takers. The open interest is zero.
The second is the Jan. 15/2027 $60 call well in-the-money with an ask price of $44.50, for a breakeven of $104.50, or 7.1% higher than its current share price.
In one respect, it’s very risky, with the ask price representing 46% of its share price. On the other hand, reversion to the mean suggests ZBH stock has a 7% appreciation over the next 21 months or so.
I’ll leave it with you.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
