Zimmer Biomet Holdings Inc (NYSE:ZBH) Screened as a 'Decent Value' Investment Opportunity

In the search for investment opportunities, many market participants turn to the principles of value investing. This long-term strategy, popularized by figures like Benjamin Graham and Warren Buffett, involves identifying companies trading for less than their intrinsic value. The goal is to find stocks the market has overlooked or undervalued, providing a potential "margin of safety" for the investor. One method to uncover such candidates is by screening for companies with strong fundamental valuation metrics, while still maintaining acceptable scores in other critical areas like financial health, profitability, and growth. This approach helps filter for businesses that are not just cheap, but cheap for no good reason, potentially offering an interesting risk-reward proposition.

A recent screen for "decent value" stocks, which emphasizes a high valuation rating alongside satisfactory scores in other fundamental categories, has highlighted Zimmer Biomet Holdings Inc (NYSE:ZBH) as a candidate worthy of closer examination. As a global leader in designing and manufacturing orthopedic reconstructive products and surgical technologies, Zimmer Biomet operates in a stable, necessity-driven sector of healthcare. Let's look at the fundamental report to see why it appears on this radar.

Valuation: The Core of the Value Proposition

For a value investor, valuation is the starting point. A stock must trade at a discount to its perceived worth or its peers to be considered a true value opportunity. Zimmer Biomet's fundamental report shows a strong Valuation Rating of 7 out of 10, indicating the market prices its shares attractively relative to its financial performance.

• Price-to-Earnings (P/E) Ratio: At 11.30, Zimmer's P/E ratio is considered reasonable. More importantly, it is valued cheaper than approximately 94% of its peers in the Health Care Equipment & Supplies industry, where the average P/E sits above 41. It also trades at a significant discount to the S&P 500's average P/E of over 27.
• Forward P/E and Cash Flow: The attractive valuation extends to forward-looking metrics. With a Price/Forward Earnings ratio of 10.64, it remains cheaper than nearly 95% of its industry. Similarly, 95% of industry competitors are more expensive based on its Price/Free Cash Flow ratio.

This broad-based discount suggests the market may be applying a low valuation, potentially creating an opportunity if the company's other fundamentals hold steady or get better.

Financial Health: Assessing the Foundation

A cheap stock is only a good deal if the company is financially sound. A value trap often lurks in businesses with weak balance sheets. Zimmer Biomet receives a neutral Health Rating of 5. The analysis reveals a mixed picture, which is why the screening criteria requires only a "decent" score, ensuring the company isn't on shaky ground.

• Solvency: The company's Altman-Z score of 2.43 indicates limited near-term bankruptcy risk and is better than about 66% of its industry. However, its Debt-to-Equity ratio of 0.59 shows a moderate reliance on debt financing and is less favorable than many peers.
• Liquidity: On a positive note, Zimmer Biomet displays solid short-term financial health with a Current Ratio of 2.43, meaning it has more than enough current assets to cover its current obligations.

While not the strongest in its sector, the company's overall financial health appears adequate, supporting the idea that its low valuation isn't primarily driven by balance sheet distress.

Profitability: The Engine of Value Creation

Sustainable profitability is crucial for a value investment, as it validates the business model and supports future intrinsic value growth. Zimmer Biomet earns a Profitability Rating of 6. Its margins are a particular strength, indicating efficient operations.

• Strong Margins: The company has an Operating Margin of 19.10%, outperforming 91% of its industry. Its Gross Margin of 71.44% is also solid, better than 80% of peers. These high margins provide a buffer against economic downturns and competitive pressures.
• Return Metrics: Its Return on Invested Capital (ROIC) of 5.73% places it in the top quartile of its industry. However, the report notes this ROIC is currently below the company's cost of capital, an area for potential improvement.

The consistent profitability and industry-leading margins suggest Zimmer Biomet possesses competitive advantages and pricing power in its market, a positive sign for long-term value.

Growth: The Catalyst for Re-rating

While pure value stocks may not exhibit high growth, some forward momentum is necessary to drive a re-assessment by the market. Zimmer Biomet's Growth Rating is a neutral 4. The screen looks for "decent" growth, and the report indicates the company is in a transitional phase.

• Past Performance: Recent growth has been modest, with Revenue growing 5.47% over the past year but showing a slight average decline over a longer period. Earnings Per Share (EPS) growth has also been slow.
• Future Expectations and Acceleration: The outlook is more promising. Analysts expect EPS to grow by about 5.5% annually in the coming years, with Revenue growth projected near 4.7%. Crucially, the report states that the growth rate for both EPS and Revenue is increasing compared to the past.

This expected increase in growth could be a key catalyst. If Zimmer Biomet can deliver on these modest but improving growth forecasts, the market may re-evaluate its currently low valuation multiples.

Conclusion

Zimmer Biomet presents a profile that aligns with a disciplined value approach: it is fundamentally cheap compared to both its industry and the broader market, yet it is supported by adequate financial health, strong profitability margins, and expectations for increasing, albeit moderate, growth. It is not a perfect company, its debt levels and ROIC are points for monitoring, but the significant valuation discount appears to price in these concerns generously. For an investor with a long-term horizon, this combination may represent the "margin of safety" that value investing seeks.

Interested in exploring other stocks that fit this "decent value" profile? You can run the same screen used to find Zimmer Biomet to see a refreshed list of potential opportunities. Click here to view the Decent Value Stocks screen.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results.