ZBH - ZimVie: A Somewhat Complex Story

2023-10-16 07:56:47 ET

Summary

• Today, we take a closer look at ZimVie Inc., a medical device maker that was spun out from Zimmer Biomet Holdings early in 2022.
• The spinoff has done little but destroyed shareholder value to this point.
• However, the stock appears cheap on a price-to-sales basis and insiders are net purchasers of the shares so far in 2023.
• Is ZimVie in the 'buy zone' yet?  An analysis follows in the paragraphs below.

Peace begins with a smile ."? Mother Teresa

Today, we take our first look at a small medical device maker called ZimVie Inc. (ZIMV) . The stock has done little for investors but destroyed shareholder value since being spun out from Zimmer Biomet Holdings, Inc. (ZBH) in the first quarter of 2022. Just over 80% of the new company was spun out to Zimmer Biomet Holdings at the time with Zimmer holders getting one share in the new company for every ten they held in Zimmer. This allowed it to separate its Dental and Spine businesses from the rest of the company. Zimmer Biomet also kept a nearly 20% stake in ZimVie with the intention to use it to satisfy some of its own indebtedness. As an article on Seeking Alpha noted last year, this structure contributed greatly to the stock's horrid performance in 2022 (see chart below)

The stock seems more than cheap from a price-to-sales ratio and the company is solidly profitable on a non-GAAP basis. An analysis follows below.

Company Overview:

This medical technology company is headquartered just outside of Denver in Westminster, CO. This small cap company develops and markets a portfolio of products and solutions designed to treat various spine pathologies and support dental tooth replacement and restoration procedures. Approximately 55% of overall sales comes from the company's dental business while the spinal segment contributes the rest. The stock currently trades just above eight bucks a share and sports an approximate market capitalization of $220 million.

Second Quarter Results:

ZimVie posted second quarter numbers on August 2nd. The company had a non-GAAP profit of 17 cents a share, 14 cents a share above expectations. Sales fell just over four percent on a year-over-year basis to just under $225 million. However, this was some $12 over the consensus. It should be noted on a GAAP basis the company had a net loss of $23.4 million, up from $8.7 million in the same period a year ago.

Global third-party net sales of the company's dental business came in at $118.7 million, slightly over the same period a year ago. U.S. sales were $69.3 million which was down 1.3% from 2Q2022.

Global third-party net sales from ZimVie's spinal division were $106.2 million, down nearly eight percent on a year-over-year basis. In August, the FDA approved a smaller height for the company's Mobi-C cervical disc implant, which is an important component of that division's product portfolio.

ZimVie's management lifted its FY2023 sales guidance to $850 million to $870 million, up from previous guidance of $835 million to $860 million. The company also bumped up its projection for non-GAAP profit in FY2023 from between 40 and 60 cents a share to 50 and 70 cents a share.

Analyst Commentary & Balance Sheet:

Two analyst firms chimed in on the company after it posted its second quarter results. JPMorgan raised its price target to $15 from $10 previously but maintained its Neutral rating on the stock. Barclays reissued its sell rating on ZIMV but did bump up its price target after second quarter numbers came out from $7 to $11 per share. Those are the only two analyst firm ratings I can find on the stock so far in 2023.

Just over five percent of the outstanding float in the shares are currently held short. Several insiders bought nearly $750,000 worth of shares in March of this year. That has been the only insider activity in the equity so far in 2023.

The company ended the second quarter with just over $65 million worth of cash and marketable securities on its balance sheet. It also has $175 million available to it on an undrawn credit facility. Notably, on its second quarter 10-Q , the company listed non-current debt at just over $520 million.

Verdict:

The company posted a profit of $1.84 a share in FY2022 on nearly $910 million worth of sales. The current analyst firm consensus (2 analysts) has sales falling five percent in FY2023 and earnings dropping to 57 cents a share. They see a very small falloff in revenues in FY2024 when profits are projected to rebound to 77 cents a share.

The stock is valued at a minuscule 25% of annual sales, has net insider buying in 2023, and is profitable on headline figures. However, I don't like the opaqueness of its balance sheet especially in an era of high interest rates. In addition, on a GAAP basis, the company is currently losing money. Add in the negative analyst firm opinion on the shares, I can have no investment recommendation on ZIMV despite a compelling price-to-sales valuation.

You can only hold a smile for so long, after that it's just teeth ."? Chuck Palahniuk

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