Will S.E.T. Arm Drive Zimmer Biomet's (ZBH) Q4 Earnings?

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) is set to report fourth-quarter 2017 results on Jan 30, before the markets open.

Last quarter, the company posted a negative earnings surprise of 1.2%. However, Zimmer Biomet has outperformed the Zacks Consensus Estimate in two of the preceding four quarters, the average positive earnings surprise being 0.1%. Let’s take a look at how things are shaping up prior to this announcement.

Key Catalysts

Similar to the prior quarter, the company is expected to gain from strength in the S.E.T. (Surgical, Sports Medicine, Foot and Ankle, Extremities and Trauma) arm. In the last reported quarter, revenues at S.E.T. were driven by surgical business and sports medicine offerings such as Gel-One, Subchondroplasty and Quattro Link. Moreover, solid uptake of the A.L.P.S. Plating System within the foot and ankle portfolio boosted the segment’s performance. The company witnessed strength in IntelliCart System for fluid waste management.

Historically, strong performance by key brands and 2016 acquisitions along with increasing focus on sales force specialization have been partially offsetting adverse impacts from supply issues and continued pricing pressure within the segment.

The Zacks Consensus Estimate for S.E.T. revenues of $443 million reflects an increase of 3% from the year-ago quarter reported number.

Zimmer Biomet Holdings, Inc. Price and EPS Surprise

Zimmer Biomet Holdings, Inc. Price and EPS Surprise | Zimmer Biomet Holdings, Inc. Quote

We are also upbeat about the Spine, Craniomaxillofacial and Thoracic (Spine & CMF) segment, which is expected to deliver another quarter of promising performance. Under the spine category, Zimmer Biomet should continue to gain from strong uptake of Mobi-C Cervical Disc. Also, we are looking forward to top-line contributions from the company’s launch of products like the Avenue T TLIF Cage and Vitality + and Vital Spinal Fixation Systems in the United States in October 2017.

Moreover, although the LDR Holdings acquisition had insignificant contribution to the top line (30 basis points) in the third quarter at the initial phase of integration, it is expected to contribute 120 basis points to full-year revenues at CER. Also, management is hopeful of gaining from significant cross-selling opportunities that the acquisition provides on the back of a strong spine sales force in the United States.

Continued uptake of Trauma One Plating System, SternaLock Blu and SternaLock 360 primary closure systems as well as the RibFix Blu Thoracic Fixation System within the craniomaxillofacial and thoracic arm buoys optimism.

The Zacks Consensus Estimate for Spine revenues of $192 million indicates a rise of 0.5% from the year-ago quarter.

Overall fourth-quarter revenues are projected at $2.03 billion, up 0.9% from the prior-year quarter.

Here are the other factors that might influence Zimmer Biomet’s fourth-quarter results:

Looking at the focused execution of Zimmer Biomet’s sales teams, we expect the global adoption rate of the flagship personalized knee system — Persona — to be impressive. We are also upbeat about the launch of the Persona Partial Knee System last September. The knee system marked the latest addition to the company’s portfolio of personalized and anatomically designed knee implant systems. Also, Zimmer Biomet’s release of X-ray-based Patient Specific Instrument, X-PSI Knee System, in the first half of 2017 buoys optimism. This is the world's first CE-Marked surgical planning system that allows for patient-specific implant positioning, solely utilizing the X-ray technology. These developments are expected to boost the fourth-quarter revenues.

The Zacks Consensus Estimate for Knee revenues of $723 million indicates an uptick of 0.3% from the year-ago quarter.

Emerging markets have always been a significant revenue generating source for Zimmer Biomet. Despite the recent economic downturn in Latin America, the company managed to drive growth through its operations in other emerging markets, especially the Asia Pacific and EMEA (Europe, the Middle East and Africa). The Zacks Consensus Estimate for third-quarter revenues from EMEA of $467 million indicates an improvement of 5.2% from the year-ago quarter. Moreover, the Zacks Consensus Estimate for third-quarter revenues from APAC of $313 million indicates a rise of 3.9% from the year-ago quarter.

Meanwhile, macroeconomic uncertainties and unfavorable currency fluctuations have been denting sales for the company over the past few quarters. The company has also been dealing with pricing pressure. In this regard, Zimmer Biomet faced a negative pricing pressure of approximately 2.1% in the last-reported quarter. In the absence of any favorable changes on these lines, these headwinds might reflect in the company’s fourth-quarter results.

For the second half of 2017, management continues to expect impact from reduced sales expectations, continued spending on critical programs and rising manufacturing costs from the Warsaw North Campus facility.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Zimmer Biomet this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Zimmer Biomet has an Earnings ESP of +0.38%. This is because the Most Accurate estimate is pegged at $2.11, while the Zacks Consensus Estimate stands at $2.10.

Zacks Rank: Zimmer Biomet carries a Zacks Rank #4 (Sell). Please note that we caution against stocks with a Zacks Rank #4 and 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revision momentum.

The Zacks Consensus Estimate for fourth-quarter 2017 adjusted earnings of $2.10 reflects a 1.9% decline from the year-ago quarter.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Bio-Rad Laboratories (NYSE:BIO) has an Earnings ESP of +4.45% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Myriad Genetics (NASDAQ:MYGN) has an Earnings ESP of +0.42% and a Zacks Rank #3.

Henry Schein (NASDAQ:HSIC) has an Earnings ESP of +0.09% and a Zacks Rank #3.

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