Zimmer Biomet ZBH has been facing a difficult macroeconomic situation, which has raised expenses. Its leveraged capital structure is also a concern. The stock has a Zacks Rank #5 (Strong Sell) currently.

Factors Impeding ZBH's Growth

The ongoing industry-wide trend of staffing shortages and supply chain-related hazards is denting Zimmer Biomet’s growth. Deteriorating international trade and geopolitical complications have resulted in a tough situation related to raw material and labor cost as well as freight charges. Added to this, high policy rates to fight inflation, along with the gradual withdrawal of fiscal policies amid high debt, continue to dent economic growth, impacting the overall market situation for Zimmer Biomet.

Within the Hip category, headwinds in Russia are disproportionately impacting the outside U.S. business. Further, within the S.E.T. category, Zimmer Biomet is facing challenges in the form of reimbursement headwinds, particularly in the Restorative Therapies business. In addition, the company experienced acute supply challenges within Sports and Trauma. All these are creating significant pressure on the company’s revenues and operating profit.

During the fourth quarter, the company witnessed a 5.1% increase in the cost of products sold (excluding intangible asset amortization) and a 3.4% rise in selling, general and administrative expenses. Adjusted gross margin reflected a contraction of 123 basis points while the adjusted operating margin contracted 43 bps in the quarter. Our model projects a 5.7% and 4.2% increase in the company’s cost of product sold and selling, general and administrative expenses for 2025, respectively.

A substantial portion of Zimmer Biomet’s foreign revenues is generated in Europe and Japan. In recent times, significant increases in the value of the U.S. dollar relative to the euro, the Japanese yen, the Swiss Franc or other currencies are having an adverse effect on the company’s results of operations. In 2024, Zimmer Biomet’s net sales were adversely impacted by 1% due to changes in foreign exchange rates. The company currently expects foreign exchange to have an adverse impact of 1.5%-2% on 2025 revenues.

Zimmer Biomet Holdings, Inc. Price

Zimmer Biomet Holdings, Inc. price | Zimmer Biomet Holdings, Inc. Quote

Zimmer Biomet exited the fourth quarter of 2024 with cash and cash equivalents of $525.5 million compared with $569 million at the end of the third quarter. Total debt was $6.20 billion compared with $6.45 billion at the end of the third quarter. The reported quarter's total debt was much higher than the corresponding cash and cash equivalent level, indicating a tough solvency position. The company’s near-term payable debt of $863 million is also higher than the present level of cash in hand. This is a matter of concern for investors as, during a period of global economic uncertainties, its cash and cash equivalents will not be sufficient even for short-term debt repayment.

At the end of the fourth quarter, Zimmer Biomet's debt-to-capital ratio was 33.2%. This ratio was down from 34.3% at the end of the third quarter.

Favorable Factors for ZBH

Despite challenging market conditions in the form of pricing pressure, the last few quarters witnessed gradual stability in the global musculoskeletal market with better-than-expected sales growth in certain geographies, banking on improved procedural volume. This was driven by favorable demographics and the growing utilization of musculoskeletal healthcare in emerging markets and under-penetrated developed markets. The focused execution of the company's global sales teams amid a stable global musculoskeletal market also helped accelerate global sales for Persona, the personalized knee system.

In line with this, in the fourth quarter of 2024, the company witnessed strong growth, driven by continued procedure growth, strong execution and solid momentum in terms of innovation. The company saw another positive quarter of year-over-year momentum in large joints, with the overall global Knees, Hips and S.E.T. business growing 5.6%, 4% and 8.4%, respectively, at a constant exchange rate.

Zimmer Biomet is diligently working on strengthening its foothold in international developed and emerging markets that provide long-term opportunities for growth. The company's strategic investments in these regions over the past several quarters to improve operational and sales performance are yielding results. The company’s business particularly benefits from its strong presence in emerging markets with an extended portfolio that includes upper and lower joints. According to the company, this will help develop the extremities and trauma business going forward.

We note that strength in the Asia Pacific market has driven strong revenue growth so far. Banking on a series of product launches and strong customer adoptions, Zimmer Biomet has successfully expanded its presence in the emerging market.

Over the past three months, shares of ZBH have lost 10.8% against the industry’s 6% growth. With the company consistently focusing on strategic market expansion and new product launches, we expect the stock to regain its momentum in the coming days.

Key Picks

Some better-ranked stocks in the broader medical space are Phibro Animal Health PAHC, Penumbra PEN and Omnicell OMCL. Each of them carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Phibro Animal Health’s shares have surged 115.4% in the past year. Estimates for the company’s fiscal 2025 EPS have increased 4.3% to $1.69 in the past 30 days. PAHC’s earnings beat estimates in each of the trailing four quarters, the average surprise being 27.1%. In the last reported quarter, it delivered an earnings surprise of 28.6%.

Estimates for Penumbra’s 2024 earnings per share have remained constant at $2.81 in the past 30 days. Shares of the company have fallen 3.3% in the past year against the industry’s 7.7% rise. PEN’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 10.5%. In the last reported quarter, it delivered an earnings surprise of 23.2%.

Omnicell, carrying a Zacks Rank #2 at present, has an estimated earnings growth rate of 72.7% for fourth-quarter 2024. Its earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 121.74%. OMCL’s shares have risen 26.4% against the industry’s 15.7% decline in the past year.

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