Zimmer Biomet Holdings (ZBH)

Total return at 5 years: 7.9%/year = 7.0% appreciation + 0.9% dividend. The target price ($129) is ex-dividend; the $5 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $194 · Multiples $108) exceeds the market price ($92).

Today — fairly valued: at $92 trades ~14.4% below its value discounted to today (~$108); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($129) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$67.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($92) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-8.0%/year) than we project (4.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.1 bn of owner earnings in year 5 (vs ~$2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on NOPAT (EV/NOPAT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = TTM to Jun-2026 ($8,509 million of revenue). Year 1 is anchored to the updated 2026 guidance in the 8-K of 5-Aug-2026 (reported 3.9%-4.9%, midpoint 4.4%), which incorporates the remaining contribution of the Paragon 28 acquisition (April 2025, anniversary April 2026) and a currency tailwind of +0.5%; it then decelerates toward guided organic growth (2.25%-3.25%) before accelerating slightly toward year 5 with the ROSA®/S.E.T. innovation cycle. It is valued at the enterprise level, on a multiple of after-tax operating income, on the accounting (GAAP) basis and not the non-GAAP adjusted earnings the company reports: the available 8-K carries only quarterly and half-year adjusted earnings for 2025-2026, without the full fiscal 2025 adjusted earnings figure needed to anchor an adjusted TTM without extrapolating — under the zero rule the GAAP base is preferred, fully traceable to XBRL. This is deliberately conservative: GAAP net income absorbs ~$650 million a year of non-cash intangible amortization (the 2015 Biomet merger, Paragon 28 in 2025) that the company excludes from its adjusted measure, so the implied entry multiple on this basis is more demanding than what the market would pay looking at adjusted earnings or owner earnings. The tax rate (15.1%) is the real TTM effective rate from XBRL, not a typical rate. The TTM operating margin (14.2%) is depressed by the $170 million inventory/instruments charge of 2025 (product lines to be discontinued) and by recurring restructuring; it normalizes gradually toward 16.5% by year 5 without reaching the 2023-2024 peaks (17.3%/16.8%), because the restructuring appears structural (five programs since 2019) and not an isolated one-off. The share count is modeled with explicit buybacks (sharesPath), given that the TTM net buyback (~$751 million) is material and the company announced in August 2026 an expectation of up to $1,000 million for the year; the share reduction rate (-2.5%/year in the base case) is anchored to the average historical net reduction from 2022 to the TTM (~-2.4%/year), not to the peak of a single quarter. The base exit multiple (17.5×) is positioned in the lower third of the medical technology band (16×-22×) for the modest guided organic growth and a ROIC below the 10% bar explained by acquisition goodwill, not by low operating quality.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $129 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $92, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $129 in 5 years plus $5 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $108. Against the current market price ($92), the margin of safety is 14.4% (trades below the maximum → there is margin) and the total return at that price would be 7.9% annually.

• Entry multiple (GAAP). 24× reported after-tax operating income at today's price, above the top of the med-tech band (16×-22×).
• Multiple on owner earnings. Market value over TTM owner earnings of ~$1,631 million implies a considerably lower multiple than the GAAP one.
• Margin of safety. It trades close to intrinsic value, far from the required margin of safety.
• Return vs. hurdle. The base-case CAGR of +8% compares against the 15% great-investment hurdle and the 10% average-expected-return hurdle.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (170%, cash vs. accruals)
• ✕ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Owner earnings (~$1,631 million TTM) comfortably exceed reported net income ($807 million) due to the weight of non-cash intangible amortization.
• Return on capital. ROIC 5.2% below the 10% bar, largely explained by acquisition goodwill (Biomet merger, Paragon 28), not by weak operating profitability.
• Reinvestment runway. TTM total capex of just ~2.6% of revenue; organic growth depends more on product innovation than on intensive physical-capital deployment.
• Earnings quality. GAAP earnings absorb non-recurring charges (inventory, restructuring, litigation) that the company itself excludes from its adjusted measure, complicating direct comparison with peers.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Zimmer Biomet does not report a single operating KPI like GMV or TPV: the business is best tracked through the combination of revenue by geography, the share count (which falls steadily on buybacks), and the pace of those buybacks, which was explicitly accelerated in 2026 (program raised to up to $1,000 million). The revenue-growth drivers reported in the MD&A are volume/mix (+6.4% in 2025, with the Paragon 28 acquisition contributing 2.5 points), price (~0%, pressure offset by internal initiatives) and currency (+0.8%).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Organic growth. 2026 guidance of only 2.25%-3.25% organic at constant currency, modest for a med-tech business.
• Inorganic growth. The Paragon 28 acquisition (April 2025) contributed 2.5 points of volume growth in 2025, a build-up that fades by April 2026.
• Company's own guidance. Guidance raised twice during 2026 following above-plan results in the first half — a sign of near-term momentum.
• Fastest-growing categories. Technology & Data and S.E.T. grew +21.5% and +6.2% organic in the second quarter of 2026, above the consolidated rate.

• Competitive position. One of the big four in global orthopedics, with scale comparable to J&J MedTech, Stryker and Smith & Nephew.
• Product differentiation. ROSA®/ZBEdge® ecosystem and a portfolio of more than 6,000 patents, but orthopedic implants are largely substitutable among the big four.
• Demand recurrence. Demand for joint replacement is structural (population aging) and largely non-discretionary once surgery is indicated.
• Pricing pressure. China's volume-based procurement program and group purchasing organizations have already compressed margins in a materialized, not hypothetical, way.
• Recession behavior. Elective orthopedic surgery is sensitive to the economic cycle and to insurance coverage, though less discretionary than other medical procedures.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✕Leverage (net debt / EBITDA)Net debt / EBITDA 3.1x
• !Interest coverage (EBIT / interest)4.4x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 170% of ROIC
• ✕Value creation (ROIC − 10% bar)-5pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.2x — no over-investment
• !Float / working capitalConsumes cash $0.3 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 1.2% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt of $7,479 million against cash of $410 million; net debt of $7,069 million, a material fraction of market value.
• Short-term maturities. $1,201.5 million of debt matures in the next 12 months, requiring refinancing or repayment with operating cash.
• Operating cash generation. TTM operating cash flow of $1,743 million, with positive and growing free cash flow ($554.1 million in the first half of 2026 vs. $526.1 million in the same period of 2025).
• Floating-rate exposure. Part of the debt is referenced to SOFR, which remains above pandemic-era lows, raising the marginal cost of financing.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Nearly eight years of internal track record at Zimmer Biomet before becoming CEO in 2023, with prior relevant medical-device experience.
• Skin in the game. Directors and executives as a group own less than 1% of shares outstanding — a modest level of executive ownership.
• Capital allocation. Accelerated buybacks (up to $1,000 million in 2026) funded with free cash flow, without relying on new debt for the program.
• Candor about mistakes. The company explicitly acknowledged the disruption from the 2024 ERP transition and decided to discontinue non-competitive product lines in 2025 rather than artificially sustaining them.

• Reported net income depressed by non-cash intangible amortization (~$650 million/year, inherited from the 2015 Biomet merger and the 2025 Paragon 28 purchase), which the market looking at GAAP P/E may be over-penalizing relative to real cash generation.
• A $170 million inventory/instrument charge in 2025 for discontinued product lines, a disclosed, non-recurring event that depressed 2025 earnings without affecting the going-concern value of the business.
• A recent history of operational disruption (the 2024 ERP transition) that may have left the market skeptical about execution of the ongoing commercial transformation, even as first-half 2026 results came in above prior guidance.

Zimmer Biomet's GAAP result implies an entry multiple of 24× at today's price, above the top of the med-tech band (16×-22×) used by this method; but owner earnings (which add back the non-cash intangible amortization) imply a much lower multiple. This is compatible with missing buyers: a business with guidance raised twice this year and accelerated buybacks, whose reported earnings are penalized by non-recurring charges and non-cash amortization that does not reduce cash available to shareholders. The risk that is real — and that must be disclosed without being discounted — is that the moat is eroding under structural pricing pressure (VBP in China, group purchasing organizations), so the gap between perception and reality does not invalidate caution about long-run organic growth, which the company's own guidance puts at just 2.25%-3.25%.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -1%/year (-5% total): the margin of safety protects the downside. The bull (+16%/year, +111% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Commercial execution. The U.S. sales force transformation is an operational, legal and cultural risk explicitly disclosed by the company itself.
• Regulatory pricing pressure. China's volume-based procurement program and group purchasing organizations have already compressed margins in a concrete way.
• Technology/ERP risk. A history of operational disruption from a systems transition in 2024, with the filing warning of possible further disruptions.
• Litigation. Product-liability and patent litigation across multiple jurisdictions, with charges already excluded from adjusted earnings that could grow.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 5.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 5% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -8% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -2%/yr, bull-scenario ceiling +15%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: intangibles, switching costs, cost advantage, efficient scale → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -8%, within what we project (5%) — the story squares with the numbers.