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Dear Investors, 

Dear Investors,

Welcome to the seventh edition of our recently launched  TipRanks Smart Value Newsletter!

In each Newsletter, we aim to highlight an undervalued stock poised for long-term gains. Each week, our analysts will identify an overlooked opportunity – a company with strong fundamentals and a resilient business model, whose stock is trading below its intrinsic value.

▣ Note to Investors: As we enter uncharted territory with the onset of a global tariff war, we are now at an unstable partial truce. This environment has reduced visibility into earnings and valuations to nearly zero, leaving analysts at a loss on how to factor near-total uncertainty into their outlooks. However, markets will rally again sooner or later—as they always do. Given this backdrop, we choose to look past near-term unknowns and focus instead on strong fundamentals and sound business models, recommending quality stocks when their prices reach attractive levels relative to their industries and historical trends.

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This Week’s Top Value Pick: Zimmer Biomet Holdings (ZBH)

Zimmer Biomet Holdings (ZBH) is a global medical technology company specializing in the design, manufacture, and marketing of orthopedic reconstructive products, musculoskeletal implants, biologics, and sports medicine solutions. Its operations encompass a comprehensive portfolio of hips, knee, shoulder, and extremity implants, as well as craniomaxillofacial, thoracic, and trauma products (CMFT), supported by integrated digital and robotic technologies.

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Mending Bodies, Scaling Business 

In 1927, Justin O. Zimmer laid the foundation for a medical revolution in Warsaw, Indiana, by founding a company to manufacture aluminum splints. Over the decades, Zimmer evolved into a leader in musculoskeletal healthcare, expanding its orthopedic portfolio and global presence. In 1972, Zimmer was acquired by pharmaceutical giant Bristol-Myers Squibb, becoming part of its medical device division. A significant milestone came in 2001 when Zimmer spun off from Bristol-Myers Squibb, becoming an independent, publicly traded company. This move fueled growth through innovation and strategic acquisitions.

The company’s defining moment arrived in 2015 with the $13.4 billion acquisition of Biomet, merging two orthopedic giants to form Zimmer Biomet Holdings. This transformative deal created one of the world’s largest musculoskeletal healthcare companies, with a $45 billion market opportunity, broadening its offerings in joint reconstruction, spine, sports medicine, and dental solutions. The merger enhanced research and development capabilities, drove cross-selling opportunities, and solidified the newly formed firm’s global leadership.

Zimmer Biomet continued to sharpen its focus through targeted acquisitions, including ExtraOrtho, Synvasive Technology, ETEX Holdings, Cayenne Medical, LDR Holding, and Medtech, expanding expertise in biologics, sports medicine, spine, and surgical robotics. In 2022, the company spun off its spine and dental businesses into ZimVie Inc., enabling both entities to pursue specialized growth and deliver greater value to stakeholders. In January 2025, the company announced a $1.2 billion acquisition of Paragon 28, with the acquisition expected to close later this year.

As part of its push into digital and AI-driven innovation, Zimmer Biomet acquired Embody in 2023, gaining advanced biosynthetic implants and data-integrated platforms for soft tissue repair, followed by the 2024 acquisition of OrthoGrid Systems to enhance AI-powered surgical guidance.

Today, with a market capitalization of approximately $19 billion, annual revenues of $7.7 billion, and a #484 ranking on the Fortune 500, Zimmer Biomet continues to shape the future of musculoskeletal care through innovation and strategic growth.

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Orthopedic Precision

Zimmer Biomet operates a globally integrated business model focused on designing, manufacturing, and marketing a comprehensive range of orthopedic reconstructive products (for knee and hip replacement surgeries and other procedures); sports medicine, biologics, extremities and trauma products; CMFT products; surgical products; and a suite of integrated digital and robotic technologies.

Driven by an aging, active population and the rapid shift toward outpatient ambulatory surgical centers (ASCs) — which now account for 20% of sales, up from just 2% in 2019 — Zimmer Biomet’s revenue is led by its knee and hip implant franchises, alongside rapidly growing sports medicine and biologics segments. The company generates revenue primarily through direct sales to hospitals and healthcare providers, supported by a distributor network spanning more than 100 countries. In 2024, consignment sales accounted for roughly 85% of revenue, with no single customer contributing more than 2%. The Americas dominates revenues, contributing 95% of FY24 sales.

Innovation remains central to the company’s strategy. Zimmer Biomet is set to launch more than 50 new products by 2028, including advanced hip and knee implants, AI-assisted robotic tools through the ROSA platform, and mixed reality technologies. The recent FDA pre-market approval of its Oxford Partial Cementless Knee implant positions the company to capture share in a $1 billion U.S. market segment growing at a high-single-digit rate. Additionally, products like the Z1 Triple Tapered Stem and HAMMR system for hip surgical procedures, aim to drive U.S. revenues in the $1.5 billion hip implant market. New leadership in key business units, a direct-to-patient campaign featuring Arnold Schwarzenegger, and operational efficiencies, position it for mid-single-digit market growth and sustained financial success.

Furthermore, strategic acquisitions, like the recent Paragon 28 deal, bolster its portfolio. Paragon 28, a foot and ankle specialist, will expand the company’s reach in a $5 billion market growing in the high single digits. The acquisition will immediately boost revenue but dilute EPS by 3% in 2025 and 1% in 2026, turning accretive by 2027. It enhances the S.E.T. segment, set to outsize and outgrow the hip franchise, and strengthens ASC and global market penetration.

Although China was once among the largest emerging markets for orthopedics, especially in Tier 1 cities, ongoing regulatory reforms and geopolitical headwinds have capped its growth. As a result, Zimmer Biomet now has minimal sales exposure to China, reducing tariff-related risks to revenue. The company also has minimal supply exposure to tariffs with 66% of its manufacturing in the U.S. and no operations in Mexico or Canada. Tariff impacts are already factored into its 2025 guidance.

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Earnings Momentum

Over the past three years, Zimmer Biomet has delivered consistent financial performance, with revenue and EPS growing at a CAGR of 4% and 2.63%, respectively. This growth has been driven by strategic diversification and innovation. Originally focused on orthopedic implants, the company expanded into high-growth sports, extremities, and trauma (S.E.T.) business, which are poised to surpass its traditional hip replacement business in revenue contribution post-Paragon 28 integration.

In FY24, the company reported revenues of $7.7 billion, up 4.8% on a constant currency basis, and adjusted diluted EPS of $8, a 5.96% year-over-year increase. In Q4, Zimmer Biomet posted adjusted EPS of $2.31 (up 5% YoY) and revenue of $2.02 billion (up 4.9% in constant currency), both slightly above estimates, and marking its 12th straight quarter of mid-single-digit revenue growth.

This success stemmed from robust U.S. (+4.7% in Q4) and international (+5.2% in Q4) performance, fueled by elective procedure recovery and demographic trends. The S.E.T. segment’s rapid growth, alongside innovations like the FDA-approved Oxford Cementless Partial Knee and OsseoFit Stemless Shoulder System, bolstered results.

Despite a 1% revenue hit in FY24 from an ERP system transition, operational efficiencies stood out. Inventory days were significantly reduced, boosting operating cash flow. Free cash flows reached $1.06 billion for the year and adjusted operating margins expanded by 40 basis points, driven by cost control initiatives.

Looking ahead to FY25, the company projects revenue growth of 3% to 5% and an adjusted EPS of $8.25 at midpoint, below consensus estimates of revenue growth of 4.4% and EPS of $8.55. This is because currency headwinds pose a significant challenge with a 150–200 basis points impact on revenue and an impact of $0.20 to $0.25 on EPS. Additionally, revenue growth is expected to slow in H1 due to tough comps but rebound in H2 with new product launches and ERP stabilization. Operating margins will likely compress in H1 due to higher inventory costs and operating expenses, but are expected to improve in the second half of the year. Free cash flow is projected between $1.1 billion and $1.2 billion in FY25. ZBH is expected to announce its Q1 results on May 5^th.

The Paragon 28 acquisition, funded largely by debt, will raise the debt-to-equity ratio from the current 0.5x. Despite the added leverage, credit agencies like Fitch and S&P Global have rated ZBH “BBB” with a stable outlook, supported by 7.3x interest coverage, solid free cash flow, and flexibility to manage debt. The company’s financial flexibility supports its long-term plan of mid-single-digit revenue growth, EPS growth at an even faster clip, and robust cash flow, positioning it to thrive in the evolving orthopedic market.

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Value Play

For over a decade, ZBH has rewarded shareholders with consistent quarterly dividends, reflecting its stable financial foundation. Although its dividend yield is a modest 0.98%, ZBH’s minute payout ratio and fundamental strength support the outlook for further dividend increases. Management continues to prioritize above-market revenue growth and improved FCF to support long-term dividend sustainability, although it has not outlined a formal dividend growth target.

Beyond dividends, the company actively returns capital through share repurchases. In May 2024, its board authorized a $2 billion buyback program with no expiration, leading to $870 million in repurchases in 2024. Zimmer Biomet maintains a conservative capital allocation policy, leaving room for reinvestment and future growth.

Despite a nearly 20% stock decline in 2024, driven by cautious guidance, rising costs, and margin pressures from its ERP transition, analysts remain optimistic. Wall Street analysts are positive about ZMH as they believe that the Paragon 28 acquisition and diversification beyond orthopedics into faster-growing segments like foot and ankle, trauma, and sports medicine position the company for long-term upside. Some analysts see an upside potential of up to 46%, arguing that the stock is significantly undervalued relative to industry peers. Furthermore, discounted cash flow models suggest ZBH is undervalued by nearly 30%.

ZBH currently trades at a P/E ratio of 12.2x, 24.5% below the healthcare sector average and 33.3% below its own long-term average. This valuation comes despite stronger EBITDA margins than many peers and a ROE that is among the top third in the industry, making Zimmer Biomet one of the more attractively priced healthcare stocks with potential for both income and capital appreciation.

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Investing Takeaway

Zimmer Biomet offers compelling value for long-term investors seeking exposure to the medical technology space. The company has strong fundamentals, including robust free cash flow, expanding margins, and a leading position in orthopedic care. Strategic growth initiatives, including the Paragon 28 acquisition and next-gen product pipeline, are expected to accelerate top-line growth in high-potential segments like foot and ankle and sports medicine. With consistent dividends, a sizable buyback program, and a conservative payout ratio, ZBH balances income generation with reinvestment. Zimmer Biomet stands out as an undervalued play in medtech, with both earnings’ growth and capital return as catalysts.

• Category: Smart Value