Here's Something for Zimmer Investors to Chew On
A Wall Street Journal report gave Zimmer Biomet investors something to chew on late last week. Citing people familiar with the matter, the newspaper reported that Zimmer Biomet is considering a divestiture of its dental business.
According to the article, the company's dental business generated sales of $420 million in 2017 and about $109 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
Mike Matson, an analyst at Needham & Co., said in a report that he estimates a divestiture would not impact Zimmer Biomet's organic revenue growth but would be modestly accretive to its EBITDA margin and slightly dilutive to its adjusted earnings per share (EPS). Based on management's comments during the fourth-quarter earnings call, Matson said the company would likely use the proceeds to pay down debt, which he estimates would result in net EPS dilution of about 2%.
If, however, Zimmer Biomet were to save the cash for future mergers and acquisition opportunities, this would decrease the company's 2019 EPS by about 3.2% (about 28 cents), he said.
Matson also noted that Zimmer Biomet's dental business accounted for about 5% of the company's 2017 sales, which he estimates would grow roughly in line with the rest of the company.
The analyst said a potential dental sale would be a positive for Zimmer Biomet, despite the modest EPS dilution, because it could increase the company's operating margin, and would give the company cash to pay down some of its debt.