On Tuesday, Evercore ISI analysts downgraded Dentsply Sirona stock from Outperform to In Line, adjusting the price target to $20.00. The decision was influenced by uncertainties surrounding the dental equipment company's Byte business and a slower-than-expected turnaround in its implant and equipment sector. Additionally, a tax investigation in Germany is seen as a potential obstacle for investors.
Dentsply Sirona's current challenges include the indefinite status of its Byte operation and modest improvements in its implant and equipment division. These factors, coupled with the German tax inquiry, prompted Evercore ISI to adopt a more cautious stance as they await a clearer direction for the company's return to market growth. The analysts have also revised their earnings estimates downward, reflecting the ongoing impact on the company's Orthodontic and Implant Solutions (OIS) and Clear Aligner Therapies (CTS (NYSE:CTS)) segments.
Despite the introduction of new products like Primescan 2 and a generally improving macroeconomic environment, the analysts expect the suspension of Byte and tepid revenue growth to continue affecting Dentsply Sirona's operating profits in the coming year. The detailed analysis provided by Evercore ISI highlights these concerns, with particular attention to the costs left behind by the Byte suspension.
The German tax investigation, which scrutinizes the company's compliance in 2016-17 and could extend to subsequent years, is projected to last at least six months, if not longer. This issue could deter potential buyers, as Germany accounts for a high single-digit percentage of Dentsply Sirona's sales. The company has firmly stated that it has adhered to all relevant laws, but the duration and extent of the investigation may cast a shadow over its performance in the near to medium term.
Despite acknowledging that Dentsply Sirona's valuation is relatively low, Evercore ISI prefers to wait for signs of sustained macroeconomic improvement and more clarity on the German tax case before taking a more positive view on the company's broader recovery prospects.
The analysts note that if the company attains low-to-mid single-digit organic growth and high single-digit EPS growth, there could be potential upside to its valuation, as similar medical technology assets are trading at low-to-mid teens FY25 EPS multiples.
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