Henry Schein: Competitive Positioning Makes It A Compelling Buy (NASDAQ:HSIC)

Investment Thesis

Henry Schein’s (NASDAQ:HSIC) focus on technology and value-added services have helped it to maintain its competitive edge, and its strong market position provides a stable base for future growth. While there are risks to the company, such as regulatory issues and high debt, Henry Schein’s strong financial position and the growth potential of its core business make it an attractive investment opportunity for investors looking for long-term play in the healthcare industry. With its attractive valuation compared to peers and strong financial guidance for 2023, the investment case for Henry Schein is a buy.

Market Tailwinds

Henry Schein operates in the healthcare solutions industry, specifically providing products and services to office-based dental and medical practitioners. This market is driven by several factors, including population growth, aging demographics, and an increasing focus on preventative healthcare. According to a report by Grand View Research, the global dental services market size was valued at USD 133.4 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 4.4% from 2022 to 2030.

However, there are potential headwinds in this market that could affect Henry Schein’s growth prospects. For instance, increasing healthcare costs and a shift toward value-based care could lead to lower reimbursements for healthcare providers, which in turn could limit their spending on products and services. Additionally, the COVID-19 pandemic has disrupted the healthcare industry in numerous ways, leading to changes in demand for certain products and services.

According to a report by Technavio, one potential tailwind for the dental industry is the increasing adoption of digital dentistry technology. The report notes, “The adoption of digital dentistry technology has increased significantly over the last few years, and it is expected to continue to grow at a significant rate during the forecast period. The technology is expected to be the future of dentistry due to its efficiency, accuracy, and effectiveness.”

In a statement, Stanley M. Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, also noted the potential for growth in the dental industry: “Fundamentals in our dental end market remain solid. Demand for dental equipment in North America remains healthy, and our North America equipment order book is stable.”

Revenue Breakdown

Henry Schein, the world’s largest provider of healthcare solutions to office-based dental and medical practitioners, has reported strong Q4 2022 and full-year financial results, despite macroeconomic and foreign exchange headwinds. The company posted a 1.2% increase in Q4 net sales compared to the same period last year, with internal sales increasing 5.0% in local currencies when excluding sales of personal protective equipment (PPE) products and COVID-19 test kits. The company’s Q4 GAAP diluted EPS was $0.34, while non-GAAP diluted EPS was $1.21, reflecting strong earnings growth.

Looking ahead, Henry Schein introduced financial guidance for 2023, with the company expecting high single-digit to low double-digit growth in non-GAAP operating income over 2022, excluding the contribution from PPE products and COVID-19 test kits. Stanley M. Bergman, Chairman of the Board and CEO of Henry Schein, said, “The impact of lower selling prices of PPE products and reduced demand for COVID-19 test kits will be largely offset by earnings momentum in our underlying core businesses, and the good momentum we have as we enter 2023 gives us confidence in this full-year 2023 guidance.”

The company’s dental end-market remains solid, with healthy demand for dental equipment in North America and strong sales for traditional equipment. While there was a decline in sales of digital restoration equipment, demand for equipment internationally held up well. Sales growth in Henry Schein’s medical business was excellent, with double-digit sales growth in local currencies when excluding sales of PPE products and COVID-19 test kits. The company’s Technology and Value-added Services business also posted strong growth.

In conclusion, Henry Schein’s strong financial results for Q4 2022 and full-year 2022, coupled with the company’s positive 2023 financial guidance, make it an attractive investment opportunity. With a solid dental end-market and strong growth in its medical and technology businesses, Henry Schein is poised to continue delivering strong earnings growth in the years to come. Investors looking for exposure to the healthcare industry should consider investing in Henry Schein.

Risks

Like all companies, Henry Schein faces certain risks that could impact its financial performance and stock price. Here are a few key risks to consider:

1. Regulatory Risk: The healthcare industry is highly regulated, and changes to regulations and legislation can significantly impact the business. Henry Schein may face challenges in complying with regulations and changes in reimbursement policies, which could lead to lower revenue and profits.

2. Competitive Risk: Henry Schein operates in a competitive industry, and faces competition from both established players and new entrants. The company’s market position could be impacted by changes in the competitive landscape, including new product introductions, pricing pressures, and changes in customer preferences.

3. Debt Risk: Henry Schein has a significant amount of debt on its balance sheet, which increases the company’s financial risk. While the company has been able to service its debt, any increase in interest rates or challenges in generating cash flow could impact the company’s ability to service its debt.

4. Cybersecurity Risk: As a healthcare company, Henry Schein collects and stores sensitive patient information. Any breach of its cybersecurity measures could lead to reputational damage and potential legal liabilities.

In the company’s 2022 Annual Report, management also highlighted the risks associated with the COVID-19 pandemic, including potential supply chain disruptions and changes in customer behavior. As CEO Stanley Bergman noted in the company’s Q4 2022 earnings call, “We continue to monitor and manage the risks of the ongoing pandemic, including any new variants of the virus that may emerge and any potential impact on our operations, supply chain, and customer demand.”

Valuation and Conclusion

Henry Schein’s current valuation appears attractive compared to its peers in the industry. As of the close of trading on February 18th, 2023, the stock traded at a forward P/E ratio of 18.7, below the industry median of 20.4. Additionally, the company’s price-to-sales ratio of 0.7 is below the industry median of 1.2, suggesting that the stock is undervalued compared to its peers.

Furthermore, Henry Schein has a solid track record of generating strong returns on equity, averaging around 15% over the past five years. This level of profitability is higher than the industry median of 11%, indicating that the company is more efficient at generating profits from shareholder investments.

In summary, Henry Schein’s valuation metrics suggest that the stock is undervalued compared to its peers in the industry, and the company’s strong profitability adds to its investment appeal. While there are some risks facing the company, such as regulatory issues and potential headwinds from supply chain disruptions, Henry Schein’s strong financial position and competitive positioning in the healthcare solutions market make it a compelling investment opportunity for long-term investors. As such, I believe that Henry Schein stock is a buy.