The sheer amount of macro-type (bad) news spewed out by all forms of media over the last few weeks has made it very difficult for those of us used to praising the virtues of a “bottom-up, stock by stock approach, to practice our craft. As a citizen of one of the much maligned “PIIGS”, watching one of the I’s (Ireland) succumb to a sizeable EU-bailout, hot on the trail of the biggest outcast of all (the Greeks), serene is not how I would define my state of mind.
And yet it is at times like these when it pays to be particularly discerning and factual in order to avoid the throwing of the proverbial baby out with the bathwater. With this in mind I made the effort to avoid CNBC television for an entire week (no small feat when one spends time in German-speaking countries without so much as a basic notion of the local lingo…). Time otherwise spent, or as some would rightly say, wasted, watching the usual talking heads from the US-based channel was instead put to better use by digging into publicly available information of some promising companies.
Simply running some basic low P/E, low P/B screens churned out a number of names that attracted my interest right away. Enhancing the output of this purely quantitative step with a mental check for company, sector and product familiarity led me to naturally focus on Zimmer Holdings Inc, (NYSE:ZMH) a US-based “global leader in the design, development, manufacture and marketing of orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related surgical products”, as described in the CBS Marketwatch company profile.
Put briefly, here we have a research-heavy, technological and brand leader serving a segment of the population which is experiencing secular growth unlikely to be reversed anytime soon, read the elderly. Demand for its products whilst not end-user driven, has been unwavering throughout the harshest economic downturn in the last 70 years, with revenues essentially flat of the last 3 years and EPS at a constant level of around $ 3,50. As such it current $50 equity price-tag is a very reasonable 14,5x.
If that were not enough, Zimmer enjoys large barriers to entry, (this is not a sector where low-cot Chinese knock-off are well received), has enviable cash flow, (some $ 700 M this year alone on revenues of $4 Billion) and considerable pricing power as a by-product of its category-naming brand (think the “Zimmer-frame”).
Balance-sheet strength is not a reason for concern as the company has been adeptly retiring debt and currently sports net current assets in excess of $ 2,1 billion versus $1.1 Billion in 2006.
Admittedly, the extent of the research conducted so far does not warrant an immediate decision, having only covered some 2 of the 7 steps I outlined in my stock search process as written up some months ago in the post “Process vs. Results”. However, full certainty can never be attained in this business and it does at least point us in the right direction. From here on in it’s up the reader to take it a step further and make up his or her own mind on ZMH.
If you ask me, it seems to provide the odds I like to play with…
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