Dentists may find that patients are more willing to spend on restorative procedures now that the job market is recovering and consumer sentiment is heading higher. That offers new opportunities for providers of dentistry equipment, such as Sirona Dental Systems (NASDAQ:SIRO), a company that was spun out of Siemens in 1997 and brought public in 2006.
If recent trends in employment and confidence continue, pent-up demand from consumers for dentistry could benefit a variety of other suppliers, too, including Align Technology (NASDAQ:ALGN), 3M (NYSE:MMM), and Danaher (NYSE:DHR).
Turning a corner toward demand growth
After climbing 1.8% per year from 2002 through 2008, spending on dentistry slipped 0.3% per year from 2008 through 2011. Contributing to that sluggish U.S. spending growth was a lack of adequate insurance coverage. Roughly two-thirds of American adults don't have dental plans. That gap in coverage and typically higher out-of-pocket expenses for those who do have plans means slower sales when consumers retrench.
But that dynamic may be changing as the unemployment rate slips lower and consumer confidence climbs. Unemployment fell to 6.7% from 7.9% a year ago in December, and the Conference Board's sentiment index stood at 78.1 last month -- the best year-end reading in six years.
Growing sales this past year
Despite a 100-year history serving dentists, Sirona isn't as widely known among investors as maybe it should be. The company is one of the biggest makers of dental products, including CAD/CAM systems for restoration, X-ray systems, beds, and preventative care instruments. That diverse product lineup produced $979 million in fiscal 2012 sales and $1.1 billion in fiscal 2013 revenue, including a record $279 million in sales last quarter. http://www.sirona.com/en/investors/investor-news/ See Q4 pdf http://www.sirona.com/en/investors/investor-news/
Sirona's fastest growth has come from its CAD/CAM systems in the past year. Sales of those systems, which are used to design replacement teeth, jumped 22% year over year in fiscal 2013. The company sold $107 million worth of CAD/CAM products during the third quarter, up 35% year over year thanks to trade-ins and new customers.
Sirona also saw sales of its X-ray systems grow double digits, climbing 10% in the past year. Sales of the company's imaging products totaled $97 million last quarter. Revenue from its beds, referred to as treatment centers, grew 7%, and instrument sales improved by 1% in fiscal 2013, too.
Sales in the United States were particularly strong, with sales improving 18% in the past year. Demand from Germany, where sales climbed 23%, helped overseas sales climb nearly 10%, too.
Competing firms are also seeing sales grow
Align Technology, one of the best performing medical-equipment companies last year, saw sales climb to $165 million in the third quarter, up 20%. That growth came thanks to its well-known Invisalign brand orthodontics, which account for 93% of the company's sales. That performance has Align guiding the Street to expect fourth-quarter unit volume growth of 21% to 24% when it reports results on Jan. 30.
The far more diversified 3M, which sells a wide array of products for preventative care and orthodontics, is also enjoying sales growth for its medical business. Across dental and medical clinics, and hospital customers, 3M's health-care sales were up 5.5% in the third quarter and 4.3% over the first nine months of 2013 versus the prior year.
Similarly, Danaher's dental business saw its sales grow from $489 million last year to $510 million in the third quarter this year. Revenue from dental products grew from $1.45 billion in 2012 to $1.5 billion over the first nine months of 2013. About 1.5% of the 3.5% growth in nine-month sales came thanks to product price increases. But the rest came from volume growth, including low-single-digit percentage growth for Danaher's dental equipment. Overall, Danaher's sales were up in all its major dentistry product categories last quarter, driven by strong demand in North America.
Converting sales into profit
Sirona's profit margin was about the same as fiscal 2012, at 53.7% in fiscal 2013. That was up 0.2% and worked out to earnings per share of $3.41, up 12% from $3.03 last year.
The fact earnings grew more quickly than sales is a good sign and is likely to continue in fiscal 2014. Sirona is forecasting that sales will grow by low mid-single digits this year, good enough to deliver $3.60-$3.70 in earnings per share. That would suggest earnings will outpace sales growth by at least a few percentage points at the low end of its guidance.
Fool-worthy final thoughts
The predictability of Sirona's business, solid margin, and a net cash position of $167 million allowed the company to boost its share buyback program by $100 million exiting the third quarter. Of course, for Sirona, Align, 3M, and Danaher to outpace their growth forecasts, the economy will need to keep improving. If it does, the industry should see preventative and restoration dental demand climb over the coming years, given that large number of potential patients from the aging population.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.
The Motley Fool recommends 3M. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
Stocks to Watch in Dental Products: Henry Schein Inc. and Sirona Dental Systems Inc.
Should you fill the cavities in your portfolio with these two dental stocks?
4 Best Stocks to Invest in the Dental Business
Relatively safe but with good long-term prospects, here are the four best stocks in the dental business.
Why This Long Term Growth Story Is Set for a Slower Year
Sirona has great long term growth prospects, but it's set to slow this year.