Unless we can somehow make a profit, even investors can find a trip to the dentist's office dull, depressing, and disagreeable. Wandering through an SEC filing is similar to a trip to the dentist in this respect; when your company reports slipping sales in its two core markets, it's like having a root canal.
Dental supply company Dentsply International (NASDAQ:XRAY) reported record sales and earnings for the third quarter but missed analyst expectations on revenues and saw slowing trends in the markets that represent more than 40% of the company's total sales. Sales in the U.S. and Europe were disappointing, at growth rates of 1.6% and 0.4%, respectively, even as Asia remains very positive with 16% internal growth.
Dentsply is a 100-year-old manufacturer of dental prosthetics, crown and bridge materials, as well as endodontic instruments and materials. Heretofore, it was forecasting annual internal growth of 5% to 6% this year, with free cash flow growing at 14% annually over the next five years. Could these missed forecasts and slipping growth rates mean that investors have little to smile about with Dentsply?
I think while investors may grimace a little, it's a condition that will wear off faster than a shot of Novocain. Going into the months of August and September, Dentsply's sales in the Southeast were running ahead of 2003's sales. Then the region, which accounts for 16% to 18% of U.S. sales, was hit by four back-to-back hurricanes, and sales there dropped 4% to 5% below 2003's numbers. It didn't help either that anesthetic sales were off by 24% for the entire quarter, even though they make up a relatively small portion of overall sales.
Europe didn't have weather-related problems, but Germany, which represents 50% to 55% of all European sales, did have state fiscal policy woes. Several states in the Republic went over budget. That caused reimbursements to dentists to drop precipitously. Though unanticipated, the drop was undoubtedly caused by the high volume of procedures performed in the first quarter. Germans had scheduled various cosmetic procedures in the fourth quarter of 2003 in order to receive reimbursement when the work was done early in the year. That caused some states to pay more than anticipated early on, leaving little money left for procedures done later in 2004. Germany has changed how it reimburses dentists going into 2005, so it should not be an issue in the future.
With the rest of Europe growing at 4.5% for the quarter, ahead of the normal growth rate of 3.5%, and Asia showing its third consecutive quarter of double-digit growth, the prospects for future growth remain intact, if slightly delayed.
Dentsply owns most of the markets into which it sells because it has acquired most of its main competitors, including DeGussa and Friadent, which had been a unit of AstraZeneca (NYSE:AZN). The company is also casting about for acquisitions in Asia, particularly in Japan. With more than $407 million in cash, it should not have to take on too much debt to do so, as it has been steadily whittling down its long-term debt load, which stands north of $781 million. New products such as Oraqix should also augment sales, as the company expects it to capture anywhere from 30% to 40% of the anesthetic market.
Investors apparently were anesthetized by Dentsply's earnings, knocking the stock down by about 4% Wednesday. But since the missteps do appear to be temporary and not completely of the company's making, investors should have a twinkle in their eye and a gleam in their smile in the years ahead.
Fool contributor Rich Duprey owns shares of Dentsply but does not own any of the other stocks mentioned in this article.
