Stifel reiterated its Buy rating and $130.00 price target for Zimmer Biomet (NYSE:ZBH) shares, despite the company's disclosure of an enterprise resource platform (ERP) transition issue. Zimmer Biomet revealed at a competitor conference that this problem, first identified in August, is expected to create approximately a 1% drag on full-year 2024 sales, translating to a $75 million increase in top-line pressure for the remainder of the year.
The company's management elaborated on the specifics of the ERP transition challenges and their financial consequences. They clarified that production and manufacturing are not being hampered, but the ability to ship products promptly has been negatively affected. The Sports/Extremities/Trauma (SET) and Other segments are primarily impacted, with some lesser effects on the Knees/Hips segments.
Despite these issues, CEO Ivan Tornos emphasized the strong performance of the Knee/Hip segments, which are faring "better than" the first half of 2024, and assured that the root cause of the ERP problem has been identified. A resolution is in progress, with a new transition team and third-party consultants now in place.
Regarding sales impact, Zimmer Biomet estimates that over half of the $75 million negative ERP-related sales impact will occur in the third quarter of 2024, with the remainder expected in the fourth quarter as the company works towards resolving the issue. The company anticipates a ~210 basis points headwind to third-quarter sales, based on projections of $1.83 billion in sales for that period.
The ERP-related challenges are also expected to have a "normal flowthrough" to the bottom line, although Zimmer Biomet plans to mitigate the financial impact through cost efficiency initiatives. Additionally, the company acknowledged the possibility of losing some business to competitors as physicians might choose alternative devices rather than postponing procedures. However, there is potential to regain certain orders as the ERP issues are resolved towards the end of 2024.
Stifel has chosen not to adjust its model estimates immediately, opting to more thoroughly assess the ERP-related challenges. Nonetheless, it is evident that Zimmer Biomet's outlook for the second half of 2024 will be adversely affected by the ongoing ERP transition issues, which may soon impact consensus sales, margin, and EPS estimates for the rest of the year.
Zimmer Biomet Holdings (NYSE:ZBH), Inc. has seen several significant developments. The company has completed a $700 million financial transaction involving the issuance of notes due in 2034, providing additional capital. In a strategic move, Zimmer Biomet is set to acquire OrthoGrid Systems, a company specializing in AI-driven surgical guidance, to bolster its technological capabilities.
The company's shares have been subject to adjustments by Canaccord Genuity and Stifel. Canaccord Genuity reduced its price target for Zimmer Biomet to $120 from the previous $130, maintaining a Hold rating. Stifel, on the other hand, adjusted the shares target to $130 from $135, keeping a Buy rating.
Zimmer Biomet has also secured $2.5 billion in credit facilities, strengthening its liquidity position. The company's efforts towards AI integration, strategic acquisitions, and financial fortification indicate a focus on future expansion and resilience.
InvestingPro Insights
As Zimmer Biomet (NYSE:ZBH) navigates through its ERP transition challenges, it's important for investors to consider the company's broader financial health and market position. According to InvestingPro data, Zimmer Biomet boasts a market capitalization of $21.86 billion and has maintained a gross profit margin of 71.79% over the last twelve months as of Q2 2024. This indicates a strong ability to generate revenue over and above the cost of goods sold, which may provide some cushion during the ERP transition period.
One of the InvestingPro Tips highlights that Zimmer Biomet is trading at a low P/E ratio relative to near-term earnings growth, with an adjusted P/E ratio of 18.64 as of Q2 2024. This suggests the stock may be undervalued given its growth prospects. Additionally, the company has demonstrated stability by maintaining dividend payments for 13 consecutive years, with a current dividend yield of 0.84%. This track record could appeal to income-focused investors, especially in volatile market conditions.
For those looking to delve deeper into Zimmer Biomet's financials and future prospects, InvestingPro offers a wealth of additional tips, with 22 analysts having revised their earnings downwards for the upcoming period, indicating potential headwinds. However, the company is also trading near its 52-week low and has been profitable over the last twelve months, which might present a buying opportunity for long-term investors. To explore further, investors can access a total of 7 InvestingPro Tips for Zimmer Biomet, providing a comprehensive analysis of the company's performance and outlook. Find these insights and more at https://www.investing.com/pro/ZBH.
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