3 Reasons to Sell ZBH and 1 Stock to Buy Instead

Over the past six months, Zimmer Biomet’s shares (currently trading at $85.45) have posted a disappointing 12.4% loss, well below the S&P 500’s 9.1% gain. This might have investors contemplating their next move.

Is now the time to buy Zimmer Biomet, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Zimmer Biomet Not Exciting?

Despite the more favorable entry price, we don't have much confidence in Zimmer Biomet. Here are three reasons you should be careful with ZBH and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Zimmer Biomet’s sales grew at a mediocre 5.6% compounded annual growth rate over the last five years. This fell short of our benchmark for the healthcare sector.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Zimmer Biomet’s revenue to rise by 2.4%, a deceleration versus its 5.6% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Zimmer Biomet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.2%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

Final Judgment

Zimmer Biomet’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 10.1× forward P/E (or $85.45 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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