Henry Schein, Inc. HSIC has been gaining strength across three of its operating businesses--Dental, Medical, and Technology and Value-Added Services. Strong potential in the company’s dental technology joint venture (JV) Henry Schein One buoys optimism. Meanwhile, favorable trends in the end markets position the company well for further growth. Yet, rising operating expenses and the impact of Group Purchasing Organizations (GPOs) raise our apprehension.
Over the past year, this Zacks Rank #2 (Buy) stock has gained 9.2% compared with 4.1% growth of the industry and 18% rise of the S&P 500 composite.
The renowned global distributor of health care products and services has a market capitalization of $10.32 billion. Its third-quarter 2021 earnings surpassed the Zacks Consensus Estimate by 17%.
The company’s projected long-term earnings growth of 11.8% compares with the industry’s growth projection of 12.5% and the S&P 500’s estimated 11.7% growth.
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Let’s delve deeper.
Factors at Play
Market Dynamics: Henry Schein stands to gain from several favorable trends in the end markets, with one of the major positive trends being demographics. The increasing number of lives covered following the healthcare reforms in the United States is likely to benefit the company. We believe that an aging population and increasing healthcare expenditure across the globe will also provide additional top-line opportunities. Henry Schein is upbeat about the expected increase in dental insurance coverage along with lower insurance reimbursement rates leading to a rising need for new technologies.
Segmental Growth: Henry Schein has been witnessing solid performances across all three of its operating businesses in the third quarter. During the quarter, global Dental sales registered growth of 10.5% year over year, reflecting a continued recovery in patient traffic compared to pre-pandemic levels. Meanwhile, the company’s global Medical revenues surged 15.5% year over year and revenues from global Technology and Value-added Services arm rose 21.9% year over year.
Henry Schein One Holds Potential: We are upbeat about Henry Schein’s dental technology JV, Henry Schein One. Internationally, technology and value-added services internal sales in the third quarter increased 15.3% in local currencies compared with the prior year. This uptick was primarily driven by Henry Schein One, with particular strength in software excellence business on the reopening in the U.K. A few noteworthy offerings from the Henry Schein One portfolio include the Dentrix Imaging Center and various product enhancements like directory online booking (a self-scheduling solution for the WebMD directory).
Upbeat Guidance: Henry Schein has raised the guidance for 2021 adjusted earnings per share from continuing operations, which is now expected in the range of $4.27 to $4.35. This suggests growth of 44-46% compared to 2020.
Downsides
Impact of GPOs: The healthcare industry has been facing numerous headwinds, which have led some large integrated health care providers and GPOs to capture considerable purchasing power. The GPOs have also increased pricing pressure in the industry. These factors might be a drag on Henry Schein’s business in the future.
Mounting Expenses: Henry Schein’s selling, general and administrative expenses rose 25.4% in the third quarter. The mounting operating expenses are building pressure on the company’s bottom line.
Estimate Trend
Henry Schein has been witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its 2021 earnings has moved 0.7% north to $4.35. The company will report fourth quarter and full-year 2021 results on Feb 15, before market open.
The Zacks Consensus Estimate for its 2021 revenues is pegged at $12.25 billion, suggesting a 21.1% rise from the 2020 reported figure.
Other Key Picks
Other top-ranked stocks in the broader medical space include Baxter International Inc. BAX, Hologic, Inc. HOLX and Cerner Corporation CERN.
Baxter, currently carrying a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 9.5%. Baxter’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 10.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
Baxter has outperformed the industry over the past year. BAX has gained 9.3% against a 16.9% decline of the industry in the said period.
Hologic, carrying a Zacks Rank #2 at present, has a long-term earnings growth rate of 7.4%. The company surpassed earnings estimates in three of the trailing four quarters and missed another occasion, delivering an average surprise of 29.2%.
Hologic has declined 9.9% compared with the industry’s 16.8% drop over the past year.
Cerner, carrying a Zacks Rank #2 at present, has a long-term earnings growth rate of 12.8%. Cerner’s earnings surpassed estimates in three of the trailing four quarters and met estimates on another occasion, delivering an average surprise of 3.2%.
Cerner has gained 14.5% against the industry’s 56.3% slump over the past year.
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