This Biomedical Stock Is A 'Screaming Buy'

Andy Obermueller's picture

Monday, June 6, 2016 - 10:30am

by Andy Obermueller

In February 2013, my Dad called.

It was unusual. I talk to my father a few times each week, but it's generally me calling him. Then my Dad said something that really scared me. He asked me to have my wife join the call.

At the time, my Dad was in his late 60s. He'd been a smoker all his life -- and a fairly heavy one -- and my heart sank. Dad had been in excellent health his whole life. He ran hospitals for years and has an immune system that would eat the Ebola virus like a midnight snack. There was something going on, though, and I feared that the old man's luck had run out.

Thankfully, Dad's lungs were fine. But one of his kidneys was loaded with cancer. He'd experienced an unusual symptom and went to the doc the next day. A lot of my friends' folks have had things go wrong and done nothing, which in some cases has turned out badly. But Dad doesn't mess around. I like that about him. God help us all if I ever have to put him in a home, but when it comes to stuff like this, the smart, old hospital CEO knows what to do.

Dad knew I was nervous, and he knew I would want to do something. When things happen in our family, I have one inviolate policy. I show up. I drop everything and go. Maybe all I can do is cut the grass or get stuff from the grocery store, but I like to be there because I just couldn't live with the regret if -- well, you know.

Right now, for instance, my little sister is expecting, and you can bet your boots that when the call comes, I'll be on my way to the airport in less than five minutes. My bag's already packed, waiting for me on the back seat of my pickup. Dad knew my first reaction would be to fly to his place in Montana.

"You don't have to come, kids," Dad said, gently. "Son, I want you to listen to your Dad. This is no big deal. The cancer's only in the one kidney. It's a closed system so it hasn't spread. Doc Morris did a complete workup. Tomorrow morning I'm going to go to the hospital and have it taken out. I like the surgeon. It'll only take an hour or so, and I'm going to be fine."

There was a long silence. Jennifer was teary. And so was I. My dad's my best friend.

"All right," I said. "Let me know how it goes."

"Really?" Dad said. I could tell he was smiling. He knew I was already mentally checking my frequent-flier miles. "I thought you'd put up a little more fight than that." The next day, Dad had the surgery. It went perfectly, and his checkups have been clear ever since.

In the midst of this episode, I wound up learning all I could about surgery and surgical companies in particular. In my premium newsletter, Game-Changing Stocks, my subscribers and I seek to find companies that are changing the base assumptions about their industry. And in the process, we try to find stocks with triple-digit gain potential.

In the aftermath of this exercise, I recommended three stocks to my readers: Stryker (NYSE: SYK), Intuitive Surgical (Nasdaq: ISRG) and Teleflex (NYSE: TFX). These were good picks.

Intuitive Surgical, admittedly, did not live up to my expectations. It's only gained a little more than 15%, less than half of what the S&P did during the period since my recommendation. Stryker did well -- it beat the market 72% to 38%, and Teleflex knocked the cover off the ball: It's up more than 100%. Shares rose to $163.16 from $77.60.

Then Mom called.

She needed new hips. She had one done last year and one done this year. She recovered nicely and is up and about and happily chasing grandchildren. She'll beat me to my sister's house when the baby arrives.

Her hips were made by Zimmer. Zimmer has made magnificent advances in this sort of technology over the years, and that's one of the reasons Mom had such an easy recovery. The parent company of Zimmer, Zimmer Biomet (NYSE: ZBH), is an absolutely great buy right now. And whether you're a subscriber to Game-Changing Stocks or not, I'd like to share my case for the stock with you today...

-- In 2015, Zimmer engineered a takeover of Biomet -- which was founded by former Zimmer employees -- for $14 billion. Putting such giant organizations together is a difficult needle to thread, and that has annoyed Wall Street.

But the deal is now achieving critical mass, which is one reason why shares are up 8.5% since 2015. The sales forces are now realigned and able to cross-sell each other's products, which lead the market. Johnson & Johnson (NYSE: JNJ) and Stryker are its main competitors, each with about a quarter of the market.

-- That market is growing as the population ages. My grandparents' generation lived in fear of their hips. Today, the baby boomers regard a hip replacement as routine, and people like my mother -- who can run you ragged on the tennis court -- aren't going to suffer if they don't have to. They have the money, the insurance coverage and the medical advances to all but assure a successful recovery that will allow them to continue an active lifestyle.

-- Because joint replacements are growing in popularity, prices are coming down. We hear nonstop about rising medical prices, but this is one area that is seeing the reverse. You didn't have to listen long in ECON 101 to learn that more people are always willing to buy at a lower price, and this will juice an already strong market for replacement joints.

-- Zimmer Biomet is trading at less than 14 times estimated 2017 earnings. That's a steal and one that is unlikely to last long. Its main competitors trade at a significant premium to Zimmer Biomet's valuation: Johnson & Johnson trades at 16 times estimated earnings; Stryker trades at 18 times. I expect Zimmer's valuation to rise to the level of its competitors.

-- The company recently initiated a $1 billion stock buyback program. This is always a strong sign: Its financial managers could just as easily buy an S&P 500 fund to park its cash in, which would be expected to achieve roughly 11%. We can assume just from that that the company's board of directors believes its own stock has better prospects than the market.

-- The company has sufficient cash on hand (and future earnings potential) to carry this plan out. In addition to its cash hoard, Zimmer Biomet also has about $1.5 billion in receivables on its books, and we can presume its collection rate on these bills will be high -- insurance companies tend to pay their bills, and Medicare always does.

-- The merger will generate more than just a more able sales force. It will, according to the company, lead to $225 million in savings this year and $350 million next year. Those are dollars that likely will flow directly to the bottom line. That and the shareholder buyback will give a strong lift to earnings per share. This should really work some magic as the earnings multiple realigns with its competition.

If you happened to follow along with my Teleflex recommendation, it's time to sell. Stryker is a hold. Intuitive Surgical is also a sell. But Zimmer Biomet is a screaming buy. It has significant potential to deliver the strong gains for your aggressive growth portfolio.

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Andy Obermueller does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.