We upgrade our recommendation on DENTSPLY International (XRAY) to Outperform based on our improved visibility on the stock, stemming from attractive growth opportunities of new products and the recent acquisition of leading dental implants maker Astra Tech.
The company’s second-quarter 2011 adjusted earnings of 55 cents a share topped the Zacks Consensus Estimate of 51 cents. Profit was boosted by internal growth and favorable foreign exchange movements.
Revenues (up 7.8% to $609.4 million) also beat the Zacks Consensus Estimate driven by organic growth, favorable foreign exchange translation and acquisitions. The company beefed up its earnings guidance for fiscal 2011 based on stable-to-improving market conditions.
DENTSPLY should benefit from the gradual recovery in the global dental market. Not being a life-sustaining product, the dental market was badly affected by the economic downturn that resulted in patients deferring their adoption.
The company’s diversified product portfolio serves as a natural hedge against any significant sales shortfall in a volatile economy. The company’s overall growth strategy rests on product innovation. DENTSPLY is poised to grow its share in the dental implant market, driven by a strong product base and significant investment on product/technology innovation and sales/marketing infrastructure.
DENTSPLY has a strong international presence, enabling it to leverage the changing dental practice across North America and Western Europe. Emerging markets (such as Asia-Pacific and Latin America) offer a healthy growth opportunity on a long-term basis as they remain vastly untapped as dental penetration is low.
The company’s acquisitions and strategic collaborations will also support growth. Its recent $1.8 billion acquisition of AstraZeneca’s (AZN) dental implant unit Astra Tech represents a healthy prospect. The acquisition marks the union of two of the fastest growing dental implant businesses, creating the third-largest player in this market.
Besides reinforcing its leadership in the global dental market and broadening its product range, the acquisition enables DENTSPLY to tap new markets, such as surgical and urological consumable medical devices, for growth. DENTSPLY envisions the acquisition to contribute roughly $200 million to its revenues in 2011 and $600 million annually afterwards.
We are, however, cognizant about the impact of the supply chain disruption associated with the Japan disaster in second-half 2011. Our recommendation on the stock is backed by a Zacks #2 Rank, which translates into a short-term “Buy” recommendation.
ASTRAZENECA PLC (AZN): Free Stock Analysis Report
DENTSPLY INTL (XRAY): Free Stock Analysis Report
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