ZBH Zimmer Biomet
A steady orthopedic workhorse priced near fair value; the upside depends on margins, not growth.
The story
Zimmer Biomet is a mature, scale leader in large-joint reconstruction (knees, hips) with a growing extremities, trauma and robotics (ROSA) business, plus the Paragon 28 foot-and-ankle add-on. Its moat comes from surgeon relationships, installed instrument sets and regulatory barriers, but it has lost share to Stryker and grows at roughly market rates on top of steady procedure demand from an aging population. It is a late-mature company: GAAP margins are held down by heavy acquisition amortization, while cash margins are much healthier.
Growth of 5% in year 1 reflects mid-single-digit procedure growth plus Paragon 28, fading to 3% terminal, below the risk-free rate. The 20% target margin sits between today's amortization-depressed 14% GAAP margin and the roughly 26% adjusted margin, as amortization rolls off and the ERP/supply fixes finish. Sales-to-capital of 1.2 is the incremental rate excluding legacy goodwill (the 0.42 reported figure is inflated by the Biomet merger), which reconciles the value with the market rather than with the 21.62 baseline.
Value drivers
| Revenue growth (Y1) | 5.0% |
| Terminal growth | 3.0% |
| Forecast horizon | 7y |
| Target operating margin | 20.0% |
| Years to target margin | 5 |
| Sales-to-capital | 1.20 |
| Beta | 0.95 |
| Failure probability | 2.0% |
| Cost of capital (WACC) | 9.1% |
| Terminal WACC | 9.3% |
Valuation bridge
| PV of explicit FCFF | 6.12B |
| PV of terminal value | 11.48B |
| Equity value | 10.45B |
| ÷ shares → per share | $54.76 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 8.93B | 5.0% | 15.5% | 1.17B | 354.53M | 820.37M | 751.88M |
| 2 | 9.35B | 4.7% | 16.6% | 1.32B | 347.44M | 971.67M | 816.21M |
| 3 | 9.76B | 4.3% | 17.7% | 1.47B | 337.68M | 1.13B | 871.40M |
| 4 | 10.15B | 4.0% | 18.9% | 1.63B | 325.21M | 1.30B | 917.36M |
| 5 | 10.52B | 3.7% | 20.0% | 1.79B | 310.04M | 1.48B | 954.16M |
| 6 | 10.87B | 3.3% | 20.0% | 1.84B | 292.19M | 1.55B | 920.36M |
| 7 | 11.20B | 3.0% | 20.0% | 1.90B | 271.73M | 1.63B | 884.71M |
Key risks
- Continued share loss to Stryker's Mako in robotic knees
- Pricing pressure from hospital consolidation and China/Europe volume-based procurement
- Execution risk and leverage from serial acquisitions (net debt ~6.9B)
Catalysts
- Amortization roll-off and operating leverage lifting GAAP margins toward 20%
- New product cycle (ROSA, cementless knee, Paragon 28) and stronger ambulatory surgery center penetration