Henry Schein Grows On Strategic Buyouts, Competition Rife

On Jun 15, we issued an updated research report on Melville, NY-based Henry Schein, Inc. (NASDAQ:HSIC) . It is a leading distributor of health care products and services across the globe. The company currently carries a Zacks Rank #3 (Hold).

Post the impressive first-quarter 2017 earnings results, Henry Schein has been consistently trading above the S&P 500 market with respect to share price. Over the last three months, the stock has gained 7.6%, significantly above the 2.7% gain of the market.

We expect this bullish trend to continue on balanced growth across all four operating segments of Henry Schein. We are also encouraged by the company’sefforts to grow internationally. Apart from North America and Europe, it has presence in Australia and New Zealand as well as emerging nations like China, Brazil, Israel, Czech Republic and Poland.

Henry Schein’s revenue growth has been consistently supported by niche acquisitions. At the beginning of 2017, Henry Schein forayed into the Brazilian animal health market with a 51% investment in Tecnew. Around the same time, the company announced its decision to acquire Southern SAS. Henry Schein’s dental business is expected to gain from Southern SAS’ controlled and non-controlled pharmaceuticals as well as surgical supplies. In 2016, the company completed its majority buyout of the Poland-based Dental Cremer. Its decision to acquire 80% of Poland-based dental distributor Marrodent will also help fortify its position in emerging dental markets.

Also, Henry Schein might gain from several trends in its end markets, one of them being customer demographics. The increasing number of lives covered, following the healthcare reforms in the U.S., is likely to benefit Henry Schein. Additionally, the company’s animal health business is gaining traction on the back of tailwinds in North America as well as overseas markets. The burgeoning demand for animal health products in the U.S. should drive growth.

On the flip side, a comparative study of Henry Schein’s forward P/E (F12M basis) multiple reflects that the stock is quite overvalued. The multiple currently stands at 24.1, stretched when compared to its own range (median of 23.2). Even when compared to the Zacks categorized Medical - Dental Supplies industry, the comparison is unfavorable as the current P/E (F12M basis) for the industry is 18.6 for the last three months.

It is also overvalued when compared to the S&P 500 market of P/E (F12M basis) multiple of 18.4. We believe the company’s recent developments, including several acquisitions and tie-ups, will keep the valuation stretched for some time.

This apart, escalating costs and expenses continue to be a drag on the company’s margins and bottom line. A tough competitive landscape and pricing pressure also weigh on Henry Schein’s stock.

Key Picks

A few better-ranked medical stocks are Align Technology, Inc. (NASDAQ:ALGN) , Inogen, Inc. (NASDAQ:INGN) and Accelerate Diagnostics, Inc. (NASDAQ:AXDX) . Notably, Align Technology and Inogen sport a Zacks Rank #1 (Strong Buy), while Accelerate Diagnostics carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock added roughly 30.6% over the last three months.

Inogen has a long-term expected earnings growth rate of 17.5%. The stock has a solid one-year return of around 90.2%.

Accelerate Diagnostics has an expected long-term adjusted earnings growth of 30%. The stock added roughly 14.2% over the last three months.

3 Stocks to Ride a 588% Revenue Explosion

At Zacks, we're mostly focused on short-term profit cycles, but the hottest of all technology mega-trends is starting to take hold...

By last year, it was already generating $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for those who make the right trades early. See Zacks' Top 3 Stocks to Ride This Space >>