Henry Schein (HSIC), the world’s largest dental distributor, provides products ranging from implants to abrasives to dental tools to chairs and lights, explains Rich Moroney, editor of Dow Theory Forecasts.
Henry Schein distributes the products of many manufacturers but also sells its own branded goods. The company works with more than 1 million customers worldwide, generating nearly one-third of its revenue outside the U.S.
Its focus on small, office-based businesses with limited storage space results in a large number of fairly small orders, putting a premium on a wide shipping network with quick delivery.
Schein also sells practice-management software and services. This unit generates 5% of company revenue but 15% of profits, helped by an operating margin of more than 19%. The distribution business ran a margin of 6% last year, lower than the software unit but solid for a distributor.
The company also provides products for medical practitioners. Both core end markets took a hit during the pandemic as many offices closed or cut back on services, but Schein staged an impressive comeback last year.
In 2021, the company grew sales 23%, per-share profits 52%, cash from operations 18%, and free cash flow 16%. For that growth, credit the return of patients around the world to the offices of their dentists and doctors.
While such a post-pandemic recovery shouldn’t surprise us, the magnitude of Schein’s growth apparently did take Wall Street unaware. Sales topped the consensus by at least 3% and per-share profits by at least 13% in each of the last four quarters.
Analysts don’t expect the torrid growth to continue, projecting gains of 6% in sales and 7% in per-share profits this year and 4% and 8%, respectively, in 2023. Profit targets for both years have increased at least 4% over the last 90 days but still seem conservative — particularly when we consider how analysts have underestimated the company’s earning power in recent quarters.
Schein also has a long history of buying back its shares. The share count fell 2% over the last year. Despite a coronavirus-inspired hiatus in 2020, the count contracted 8% over the last three years and 13% over the last five.
Going forward, we expect Schein to continue its longtime trend of deploying much of its free cash flow for niche acquisitions and buybacks. We have initiated Schein as a Long-Term Buy.