An important trend that will drive stock market returns in the coming decades is demographics. Simply put, the age of citizens across the world is advancing. In the United States, the first of the Baby Boom generation was born in 1946 and is in the process of retiring. Japan, Europe and many other countries also stand out for their aging workforces. [Read: 7 Countries that Could Crash in Five Years]

What better way for investors to play this trend than with firms that help aging people stay mobile and active? Thanks to more active lifestyles and, especially in the United States, a significant increase in obesity rates, joints begin to ache and the body literally begins to wear down after years of use. Aging individuals will need expert care to help them live longer, healthier lives.

Zimmer Holdings (NYSE: ZMH) is a compelling play on an aging America. A couple of firm-specific issues and overall stock market weakness have pushed the shares into the bargain bin, both on an absolute level and compared to its rivals.

I sat down with the investor relations team at Zimmer at an investment conference recently to learn more about the company and how it plans to overcome a number of issues that have held the stock back during the past couple of years. I also came away convinced that the company has addressed most of its issues and should see growth accelerate going forward.

First, a brief overview on the company: Last year, revenue reached $4.1 billion and the company sees its addressable market at about $30 billion. This consists of reconstructive surgeries, where Zimmer provides the knee, hip and related implant devices to either repair or replace areas around the joints.

Current stats show the company has the leading market share in knee replacements at 27% and the second largest share of hip replacements at 21%. It is also a major player in extremities (shoulders, elbows, etc.) and in dental, trauma and spine surgeries. Geographically, the Americas represented 57% of sales last year, with the United States leading the way in the region. Europe accounted for 29% and the Asia Pacific region 9%.

A couple of key issues have hurt Zimmer’s near-term operating performance. For starters, the global recession hurt the overall industry much more severely than Zimmer and other leading players could have imagined. Zimmer attributed this to the severity of the downturn and a plummet in demand from individuals that were still working and could not afford to take time off work out of fear they would lose their job.

Additionally, U.S. healthcare reform efforts have lowered industry visibility. Starting in 2013, medical device firms will be hit with excise taxes that will shave 2% to 3% off prices. Zimmer estimates this would have reduced the 2009 top line by $50 million, if the taxes were implemented today. The company plans to offset this lost revenue through cost cuts and expects to see some new revenue from the 30 million patients that reforms will bring into the system.

In terms of firm-specific issues, Zimmer lost some market share during the past couple of years as other regulatory issues changed the way the industry could work with surgeons. The company conceded that it could have communicated better with surgeons that generally stick with a single medical device firm out of familiarity for its products and procedures, but it pledges to increase spending and focus on regaining lost ground.

Despite these headwinds, Zimmer continues to throw off an impressive amount of cash flow. Free cash flow reached nearly $900 million last year, or more than $4 per diluted share. For the current full year period, the company projects a modest sales increase of between +3% and +5%, but an earnings jump of about +30% if it hits the high end of its guidance range of $4.15 to $4.35 per share.

Action to Take –> At a share price below $50, Zimmer is not discounting much future growth. The forward P/E is about 11.5, which is well below a five year average closer to 20. I wouldn’t expect as high a multiple going forward, but even a mid-teens P/E implies stock appreciation potential of at least +20%.

There is also considerable earnings upside as Zimmer regains market share and is able to ramp down sales, growth and acquisition spending to more historical levels. Throw in compelling demographic trends across the world, the end of industry uncertainty in the United States, and a coming upturn in the business cycle, and Zimmer remains one of the most compelling healthcare plays in the market.