Zimmer Biomet (ZBH)- Is 11.5 the "Real" PE?

Getting behind non-GAAP adjustments to the company’s real earnings power

Zimmer Biomet's (ZBH) extensive foreign-sourced supply chain caused its stock price to plummet on the April 1 announcement of higher-than-expected tariffs. However, five days later, the company took it on the chin again after reporting Q1 results. Despite beating both top and bottom line estimates, the company lowered its EPS outlook for 2025 from $8.15-$8.35 to $7.90-$8.10. Sales growth targets remained the same as the company does not plan to raise prices to offset the higher prices resulting from the tariffs but rather absorb what cannot be offset by alternative supply chains, transfer pricing, and cost cuts.

The stock is down over 15% since the first announcement of the tariffs, which puts it at only 11.5x forward non-GAAP EPS. This low valuation may prompt many to view the company as an attractive value name. However, we believe there are several things investors should take into consideration before proceeding.

GAAP ROI is only 7%, and given the company's reliance on acquisitions for growth, we see that as overstated by the GAAP convention of not amortizing the $9 billion in goodwill, which would drop ROI to 5.7%. The $8.00 in non-GAAP earnings depends on ZBH adding back $1.00 in recurring restructuring charges, $2.31 in amortization of acquired intangibles, and $1.13 from not expensing goodwill. That makes a realistic EPS closer to $3.50-$3.60 and puts the P/E at 26x.

While there is cash flow to continue the growth-through-acquisition model, we see several earnings quality risks that investors playing this stock for a rally off its low should be aware of. Lets take a look behind the numbers: