Over the past six months, Zimmer Biomet’s stock price fell to $99.27. Shareholders have lost 6.1% of their capital, which is disappointing considering the S&P 500 has climbed by 7.6%. This might have investors contemplating their next move.

Is there a buying opportunity in Zimmer Biomet, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Zimmer Biomet Not Exciting?

Even with the cheaper entry price, we're swiping left on Zimmer Biomet for now. Here are three reasons you should be careful with ZBH and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Zimmer Biomet’s 5.3% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the healthcare sector.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Zimmer Biomet’s revenue to rise by 3.8%, a slight deceleration versus its 5.3% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Zimmer Biomet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.1%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

Final Judgment

Zimmer Biomet isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 11.7× forward P/E (or $99.27 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward one of our all-time favorite software stocks.

Stocks We Like More Than Zimmer Biomet

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