Investors often dismiss dental stocks as boring, slow-growth investments. Nonetheless, demand for dental equipment has been steadily rising worldwide. Grand View Research estimates that the global dental equipment market will grow at a compound annual growth rate of 4% between 2013 and 2020, since 60% to 90% of schoolchildren and nearly 100% of adults suffer from various dental problems. Let's take a look at two solid names in this sector -- Henry Schein (HSIC -1.69%) and Sirona Dental Systems (NASDAQ: SIRO).
Henry Schein is the world's largest distributor of dental health products and services for dentists and veterinarians. Its stock has risen about 14% since the beginning of the year, easily outperforming the S&P 500's 1% gain. The company generates revenue from three main business units -- dental, animal health, and medical products and services.
Last quarter, Henry Schein's dental revenue dipped 2.5% annually to $1.27 billion and accounted for nearly half of its top line. Excluding foreign exchange impacts, sales rose 4.6%. Animal health and medical revenue respectively declined 3.4% and rose 24.3%. On a constant-currency basis, animal health revenue was up 4.5% and medical revenue improved 25%. North America revenues, which accounted for 69% of its top line, rose 8.6% as international revenues fell 9.3%.
The company's total revenues rose 2.4% to $2.7 billion and matched analyst estimates. On a constant-currency basis, sales improved 8.3%, thanks to 4.8% growth from internally generated sales and 3.5% growth from acquisitions. Henry Schein's major acquisitions over the past two years include Scil Animal Care, which expanded its veterinary presence; Lincoln Dental Labs, which strengthened its dental laboratory distribution business; and five companies from Arseus, which bolstered its European dental and technology businesses.
On the bottom line, Henry Schein's adjusted net income rose 13.7% to $130.6 million, or $1.55 per share, beating estimates by eight cents. For the full year, the company expects its adjusted diluted EPS to grow 8% to 10% annually. For fiscal 2016, it expects earnings to grow 10% to 12% from the midpoint of its 2015 guidance.
Sirona Dental Systems
Sirona Dental Systems, which was originally spun off from Siemens AG, is a leading manufacturer of high-tech dental equipment. Its flagship CEREC system combines digital imaging with 3D printing to produce porcelain crowns, onlays, inlays, and veneers. This streamlined process replaces the older and messier method of using molds. Sirona claims that about 15% of dentists worldwide use the system, which can cut a patient's time in the chair in half.
Sirona's revenue rose 5.1% annually last quarter to $304.9 million, exceeding estimates by $9.9 million. Excluding currency impacts, revenue rose 18%. Instruments revenue improved 15.9%, CAD/CAM Systems revenue rose 11.1%, imaging systems revenue increased 2.2%, and treatment centers revenue declined 4.8%. All four segments would have posted stronger double-digit growth on a constant-currency basis. Sirona's U.S. revenues, which accounted for just a third of its top line, rose 34.2%. That gain was fueled by 18.4% internal sales growth and 15.8% acquisition-related growth.
Like Henry Schein, Sirona has grown inorganically by combining with smaller rivals. In September, Sirona agreed to merge with Dentsply International (XRAY -1.39%), which sells consumable healthcare products for dental and other healthcare markets, to become the world's largest pure-play maker of dental products, with a combined market value of over $13 billion. The new company, Dentsply Sirona, is expected to generate $3.8 billion in annual revenues, with an adjusted EBITDA of over $900 million. Sirona stock has risen 25% this year, but a large portion of those gains came after the Dentsply merger was announced. The merger is expected to be completed in the first quarter of 2016. Under the terms of the agreement, Sirona shareholders will receive 1.8142 shares of Dentsply for each Sirona share they own.
Stocks to watch, not to buy
Henry Schein and Sirona are interesting dental stocks to watch, but I wouldn't rush to buy either one. Both companies are heavily exposed to a strong dollar, which could get even stronger with interest rate hikes.
Henry Schein's P/E of 27 is also slightly pricier than the industry average of 24 for the medical equipment wholesale industry. Its forward P/E of 24 also trades at a premium to its projected earnings growth rate of 8% to 10% for the year. Sirona's P/E of 33 is also higher than the industry average of 30 for the medical appliances and equipment industry. It would also be smarter to wait for the Dentsply merger to close next year and see how the combined company fares before jumping in.