It's Almost Routine – Zimmer Crushes Analysts' Consensus Estimates... Again
BY JOHN CHOPACK, JANUARY 26, 2004
Zimmer reported an abridged 4Q:03 financial report last week along with updated guidance for 2004. While many investors have come to expect Zimmer to exceed analyst expectations, we thought the 4Q:03 could represent the most difficult challenge for the Company to achieve this goal. The reason, it represents the first financial quarter in which Centerpulse financial performance would be incorporated with Zimmer's. We were wrong.
Zimmer announced it expects 4Q:03 revenues to total $700 million which is $34 million higher than the $666 million analysts were anticipating. By our calculations, this represents a 17% increase over the combined entity's 4Q:02 pro-forma financials. According to the Company, the higher revenues should push 4Q earnings to $0.48 per diluted share excluding any acquisition and integration costs, in-process R&D write-offs and inventory step-up. This is $0.04 higher than Wall Street estimates. Zimmer also increased 2004 guidance. Previously, management targeted 2004 earnings (excluding any acquisition costs) at $1.99 per diluted share. The new target is $0.05 to $0.08 higher – or between $2.04 and $2.07 per diluted share excluding any one-time acquisition charges.
Although Zimmer provided no comment as to any driving factors behind the financial strength, we have some educated guesses of our own.
Integration of Centerpulse is ahead of schedule. We believe this is, and will be, the driving force behind Zimmer's financial performance in 2004 and 2005. The 4Q:03 financials represents the first opportunity to judge the progress of the integration, which by all publicly available indications is going well. In fact, the 17% increase in revenues over the pro-forma 4Q:02 revenues is only slightly below the 18% increase in revenues Zimmer reported during the 3Q:03 as a stand alone. Although management provided no color on the integration at this point, we expect Ray Elliott will provide extensive details during the upcoming conference call on February 10th/2004, including how distributor restructuring is going, how well previous Centerpulse representatives are selling Zimmer products and vice versa.
Zimmer's product mix shifts within its reconstructive line continue to be very strong. Zimmer has been masterful at converting surgeons to novel technologies which carry a premium price to traditional implants. These products include their Longevity™ highly cross-linked polyethylene acetabular inserts and their Prolong™ highly cross-linked tibial knee inserts. We have estimated that product mix shifts accounted for 9-10% of Zimmer's 16% constant currency revenue growth during the 3Q:03 (pricing was responsible for 3% and procedural growth represented 3-4%). We are anticipating that the roll-out of a posterior stabilized Prolong™ highly cross-linked tibial insert was one of the major drivers of product mix shifts during the most recent quarter and will continue to be during 2004.
The orthopedic market remains strong. By all indications there is no slowing in orthopedic market growth. Although some analysts have expressed concerns over pricing pressure as well as an end to favorable foreign currency translation for U.S. orthopedic companies, we believe that neither have had any significant effect on the orthopedic market during the 4Q:03. While we do acknowledge that these concerns are credible, we believe that strong procedure growth driven by favorable demographics as well as penetration into underdeveloped markets (Asia and Latin America) will compensate for these variables.
