Gathering New Information about Stocks, Health, and Sports

         Medicine is an important sector. The sector has a tremendous potential for not only future advancements, but for future profit. More specifically, the medical equipment and supplies industry has many great corporations which can provide investors with tremendous capital gains. Companies like Becton, Dickinson & Co, Boston Scientific, and Covidien all have great potential to provide investors with great returns. However, another industry component, Zimmer Holdings (ZHM), not only has a great business model, but strong fundamental data that will look very enticing to investors.

         Before looking at the financial statements, it is important to understand what Zimmer does. According to Reuters, Zimmer "designs, develops, manufactures and markets reconstructive orthopaedic implants." A vertically-inclined corporation is excellent in the medical industry. Not only can Zimmer achieve economics of scale through this strategy, but Zimmer does not need to rely on other corporations for supplies. The kind of products that Zimmer produces include: "joint and dental reconstructive orthopaedic implants, spinal implants, trauma products, and related orthopaedic surgical products." According to the Canterbury Health District Health Board, orthopaedic means "prevention or correction of injuries or disease of the skeletal system and associated muscles, joins and ligament." As the average population age continues to grow older, osteoporosis and other trauma problems will continue to grow. Zimmer's main area of production, Orthopaedic Reconstructive Implants, deals especially with knee and hip replacements through an organic process called Minimally Invasive Solutions Procedure. Other products Zimmer uses and produces include dental products. If individuals are missing teeth, Zimmer uses reconstructive methods to create the teeth. Again, this technique is very important for older individuals. Other products are used for spinal treatment, trauma, and surgery.

         These products are sold to "musculoskeletal surgeons, neurosurgeons, oral surgeons, dentists, hospitals, distributors, healthcare dealers and, in their capacity as agents, healthcare purchasing organizations or buying groups." However, the customer base is not only located in the United States. Zimmer sells its product in more than 100 different countries and operates in 24 different countries. The exposure to different nations is excellent, especially with a current weak dollar. In fact, over the past twelve months, revenue for Zimmer has reached $3.50 billion�a number 9.59% higher than the industry average. While the sales figure is not as high as the industry's 15.60% increase, the number is still quite higher than market-cap competitor Becton, which supports a 9.13% increase during the same. In addition, Zimmer's revenue of $3.50 billion is significantly higher than most other companies in this industry. However, despite a bit of slow revenue growth, share price growth has not been hindered. In 2007, the company is still up more than 5% despite the market turbulence in July and August. Interestingly, since the company's incorporation in 2001, only in 2005 has the company seen a full calendar-year negative year which was less than 15%. In 2006 the company's share price grew over 17%, and since the company's IPO over six years ago, the company is up 190%--a number way above competitors like Medtronic.

         Nevertheless, strong share price appreciation is not only the benefactor of strong revenue, but of other financial beneficiaries as well. Zimmer's earnings have been outstanding. Over the past five year's Zimmer has seen an average earnings growth of 34.56%--a number above the industry's five year average of 20.37%. While the current fiscal year's figure of 19.59% is a bit lower, the number is still respectful compared to the industry's average at 20.37% and still beats competitor's figures like Becton (15.21%). What Zimmer really excels at is its margins. Gross margins over the past year have been outstanding at 77.86%. Not only are these numbers above the company's five year average of 75.76%, but this number is also higher than the industry's 61.69%. None of Becton, Boston Scientific, or Covidien has a higher margin. Costs are not only doing well for Zimmer in terms of inventory, but for operational and profit expenses as well. Operating margins for Zimmer last fiscal year were 33.82% (above the industry's 18.10%), and net profit margins for Zimmer last fiscal year were 24.31 % (above the industry's 13.08%). More specific to net profit margins, Zimmer's recent report also beat its previous five year average of 20.40% and also beat Becton, Boston Scientific, and Covidien's respective figure.

         The strong margins correspond with strong management. Management led by CEO David C. Dvorak has done an excellent job cutting costs. When costs are low, profits are high, and return on equity becomes stronger. The last fiscal year, Zimmer saw an ROE of 17.54%. This number is above the industry's average of 16.95%. Zimmer's figure is also above Boston Scientific's ROE of 3.83%. Moreover, Zimmer is doing well in terms of cash. Price to cash flow at 17.51 is below the 23.67 multiple the industry shows. With the cash, Zimmer is looking to increase its capital expenditures. A five year growth rate of capital spending at 37.44% shows that Zimmer is taking the initiative to improve the company to make it more efficient. This type of production has worked well for Zimmer, as the past fixed asset turnover ratio of 4.61 shows revenue being produced from changes in net fixed assets. In addition, Zimmer is selling inventory fairly quickly with a 1.26 ratio, and the company is receiving its accounts receivable amounts in cash quickly as well (from insurance companies) with a 5.53 ratio. This excellent use of management will absolutely improve efficiency for this company in the future. More cash on hand, especially with high CAPX spending now, will mean even higher margins, future buybacks, and possibly a dividend yield.

         While the stated financial information is great, there may be some questions regarding valuation. Fortunately, Zimmer's forward P/E ratio of 20.36 is not only below the industry's average of 31.33, but below the trailing average of 22.45. And since Zimmer has beaten or met earnings expectations the past five quarters, there is a chance the multiple will be even lower�an oversold signal given the growth potential. In terms of market-cap competitiveness, Becton has a forward multiple of 21.48 and Boston Scientific has a ratio of 20.62. The figures are similar, but Zimmer has a much better growth potential than these corporations which makes the undervalued ratio unwarranted. While price to sales for Zimmer at 5.07 is a bit high, strong cost control will avoid atypical revenue drops that may occur during the course of this company's future. The best ratio to show this growth and valuation potential is the PEG ratio. While PEG ratios tend to be best if under one, the medical supply industry is a bit more expensive. Zimmer's PEG of ratio of 1.45 is relatively low compared to all three aforementioned competitors. Only Becton shows a PEG ratio below two (1.70). Once again, there is amazing support to illustrate that Zimmer is not only growing, but is undervalued as well.

         Therefore given the above information there is strong support for investors to consider purchasing shares of this company. Technical analysis show a 50 day SMA and EMA which both reached flattened points and are about to steadily increase. RSI is dropping below 50�an oversold and bullish indicator. In addition the parabolic SAR just recently jumped above the share price which is another bullish indicator. Therefore, Zimmer's business model, fundamental analysis, and technical analysis all support the notion that this company is a great investment for any shareholder's portfolio.

-Dennis Biray
October 20th, 2007