Henry Schein (HSIC) Misses Q3 Earnings, Margins Decline

Henry Schein, Inc. (NASDAQ:HSIC) reported adjusted earnings per share (EPS) of 87 cents in the third quarter of 2017, up 3.6% year over year. However, adjusted EPS missed the Zacks Consensus Estimate of 90 cents by 3.33%. The year-over-year upside in earnings was driven by strong revenue growth.

Revenues in Detail

Henry Schein reported revenues of $3.16 billion in the third quarter, up 10.3% year over year and also above the Zacks Consensus Estimate of $3.05 billion. The year-over-year improvement came on the back of 8.8% growth in local currencies and 1.5% increase owing to foreign currency exchange. At local currencies, internally generated sales increased 4.8% and acquisition growth was 4%.

The company recorded sales of $2.12 billion in the North American market, up 6.2% year over year. Sales totaled $1.04 billion in the international market, up 19.9% year over year.

Segment Analysis

Henry Schein derives revenues from four operating segments: Dental, Medical, Animal Health, and Technology and Value-added services.

In the third quarter, the company derived $1.48 billion in revenues from global Dental sales, up 11.1% year over year. This includes 9.1% growth in local currencies and 2% contribution from foreign currency exchange. At local currencies, internally generated sales increased 1.6% and acquisition growth was 7.5%. Internal growth at local currencies included 0.8% growth in North America and 3.2% rise internationally.

Henry Schein, Inc. Price, Consensus and EPS Surprise

The company's global Animal Health segment witnessed 11.7% rise in revenues to $882.6 million. This includes 9.9% growth in local currencies and 1.8% increase from foreign currency exchange. At local currencies, internally generated sales increased 8% and acquisition growth was 1.9%. The 8% internal growth in local currencies included 9% rise in North America and 6.9% improvement internationally.

Worldwide Medical revenues rose 8% year over year to $690.8 million. Growth in local currencies was 7.9%, with a 0.1% increase owing to favorable foreign exchange.

Revenues from global Technology and Value-added Services grew 4.1% to $109 million. This included 3.7% growth in local currencies and a 0.4% rise related to foreign currency exchange. Acquisitions contributed 0.7% in the quarter under review.

Margin Trend

Gross profit increased 6.1% to $836.1 million in the reported quarter. However, gross margin declined 90 basis points (bps) from the year-ago quarter to 26.5% due to a 12% rise in cost of sales, higher than the revenue growth rate.

Despite a 7% rise in selling, general & administrative expenses of $622.5 million, adjusted operating income improved 3.6% year over year to $213.6 million. However, adjusted operating margin contracted 40 bps year over year to 6.8% in the reported quarter.

Financial Position

Henry Schein exited third-quarter 2017 with cash and cash equivalents of $79.9 million, compared with $74.7 million at the end of second-quarter 2017. Year-to-date net cash provided by operating activities was $307.5 million, compared with $378.1 million in the year-ago period.

During the quarter under review, the company bought back approximately 1.4 million shares for almost $125 million. At the close of the third quarter, the company had $425 million authorized for repurchase of common stock.

2017 & 2018 EPS Guidance

Henry Schein updated its 2017 adjusted EPS guidance (excluding litigation settlement expenses and a fourth-quarter loss related with the company's divestiture of equity ownership in E4D Technologies). The company now expects adjusted EPS in the range of $3.59-$3.61, reflecting 8–9% growth from the 2016 adjusted EPS figure of $3.31. The previous adjusted EPS 2017 guidance range was $3.59-$3.65. The Zacks Consensus Estimate for 2017 adjusted EPS is $3.64, outside the guided range.

The company also provided the guidance for 2018 EPS. Henry Schein expects reported EPS for 2018 in the band of $3.85-$3.96, reflecting an annualized growth rate of 7-10% compared with the midpoint of the company's 2017 adjusted EPS guidance range.

Our Take

Henry Schein exited third-quarter 2017 on a mixed note. All four of the company’s operating segments recorded strong year-over-year growth. Henry Schein’s strong share gains in the North American and overseas markets along with solid revenues raise optimism.

Despite the better-than-expected revenue performance, we are disappointed with the year-over-year deterioration in Henry Schein’s gross and operating margin due to higher cost of sales and expenses.

Zacks Rank & Key Picks

Henry Schein has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical sector are PetMed Express, Inc. (NASDAQ:PETS) , Luminex Corp. (NASDAQ:LMNX) and Intuitive Surgical, Inc. (NASDAQ:ISRG) . Notably, PetMed and Luminex sport a Zacks Rank #1 (Strong Buy), while Intuitive Surgical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported earnings per share of 43 cents in the second quarter of fiscal 2018, up 79.2% from the year-ago quarter’s 24 cents. Also, gross margin expanded 548 bps year over year to 35.2% in the reported quarter.

Luminex reported adjusted earnings per share of 19 cents in the third quarter of 2017, up 216.7% year over year. Revenues increased almost 4.1% year over year to $74.1 million.

Intuitive Surgical posted adjusted earnings of $2.77 per share in the third quarter of 2017, up 34.5% on a year-over-year basis. Also, revenues increased 18% year over year to $806.1 million.

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