Zimmer Biomet Holdings Inc (NYSE:ZBH) Presents a Compelling Value Case for Disciplined Investors

For investors looking for opportunities where the market price may not fully show a company's actual worth, a disciplined screening process can help find possible candidates. One such method is to look for stocks with good fundamental valuation measures, as decided by a full rating system, while also making sure the company shows acceptable financial health, profitability, and growth. This method fits with core value investing ideas, which concentrate on finding good businesses trading for less than their intrinsic value, thus offering a possible margin of safety.

Zimmer Biomet Holdings Inc (NYSE:ZBH), a global leader in designing and making musculoskeletal healthcare products, recently appeared from such a "Decent Value" screen. The company's fundamental report suggests it presents a profile that could interest investors using a value-focused strategy.

A Closer Look at the Fundamental Report

A review of Zimmer Biomet's detailed fundamental analysis shows a mixed but interesting picture, with valuation appearing as a particular strength. The company's overall fundamental rating is a neutral 5 out of 10, but the part ratings tell a more detailed story that is key to the screening logic.

Valuation: The Strong Argument The most noticeable part of ZBH's profile is its valuation score of 7. This is the main filter in the "Decent Value" screen and for good cause. Value investing depends on buying assets for less than they are worth, and several measures show ZBH is trading at a clear discount.

• Price-to-Earnings (P/E): At 11.17, ZBH's P/E ratio is much lower than both the S&P 500 average (26.26) and its Health Care Equipment industry peer average (39.49). The report says the company is less expensive than 92.5% of its industry based on this measure.
• Forward P/E and Enterprise Value/EBITDA: The good valuation continues to forward-looking and cash-flow based measures. Its Price/Forward Earnings ratio of 10.51 and Enterprise Value to EBITDA also put it in the less expensive part of its industry, doing better than over 90% of peers.

This low valuation is the basis of the opportunity. For a value investor, it suggests the market may be setting too low a price on the company's steady cash flows and market position, possibly offering that important margin of safety.

Financial Health and Profitability: A Stable Base While the valuation is low, the screen also requires acceptable underlying fundamentals to avoid "value traps", companies that are inexpensive for a cause. ZBH's Health rating of 5 and Profitability rating of 6 give this needed base.

• Profitability Strengths: The company shows solid operational efficiency. Its Operating Margin of 19.1% does better than 91% of industry peers, and its Gross Margin of 71.4% is also strong. It has been regularly profitable with positive cash flows, which is essential for many value strategies focused on established businesses.
• Financial Health Points: The health score is average, showing a balanced solvency and liquidity position. The company has a workable Debt/Equity ratio of 0.59 and a good Current Ratio of 2.43, showing no short-term liquidity problems. However, a note that its Return on Invested Capital is currently below its cost of capital moderates the view, suggesting space for better capital efficiency.

Growth: A Modest but Getting Better Path With a Growth rating of 4, ZBH is not a high-growth stock, which is often the case with value picks. The screen looks for "decent" growth, and ZBH's profile shows a business in a steady, if slow, move upward.

• Past and Future: Revenue and Earnings Per Share (EPS) growth has been modest lately. However, the report points out a positive change: both EPS and Revenue growth rates are thought to increase in the next years compared to the past. For a value investor, this possible shift from stability to mild growth can be a key reason for the market to re-price the stock.

Conclusion: A Value Case in Healthcare

Zimmer Biomet presents a case study in the kind of opportunity a disciplined value screen tries to find. It is not a perfect business, but it is an established, profitable leader in its field trading at a large discount to the wider market and its own industry. The low valuation measures give the possible margin of safety, while its acceptable scores in health, profitability, and modest growth suggest the discount may not be justified by a broken business model. It represents the value investor's search: a quality asset at a low price.

This review of ZBH came from a systematic search for decent value stocks. Investors curious about finding other companies that meet similar standards of good valuation along with acceptable fundamentals can run the "Decent Value Stocks" screen themselves.

Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any security. The review is based on data and ratings given by ChartMill, and investors should do their own research and talk with a qualified financial advisor before making any investment decisions.