Henry Schein Misses on EPS (HSIC) (MCK) (PDCO)

Zacks

Henry Schein Inc. (HSIC) reported EPS of 99 cents in the third quarter of 2011, up 5.3% year over year but below the Zacks Consensus Estimate of $1.01. However, excluding sales of seasonal influenza vaccines for both the quarters, EPS increased approximately 11% year over year.

Henry Schein reported an 11.5% year-over-year increase in revenues to $2.11 billion, which surpassed the Zacks Consensus Estimate of $2.05 million. The revenue growth included a 7.4% growth in local currencies and 4.1% growth in foreign currency exchange rates. Internal growth was 3.3% in local currency. However, excluding seasonal influenza vaccines sales from both periods, net sales increased 12.9%, with 8.6% growth in local currencies including 4.3% internal sales growth.

Henry Schein primarily derives revenues from dental, medical, animal health, international and, technology and value-added services. These divisions accounted for 32.3% ($682.4 million), 19.1% ($402.2 million), 11.7% ($246.5 million), 34.1% ($718.5 million) and 2.9% ($62.1 million) of the total revenue, respectively, during the quarter.

North American Dental, which is the company’s largest segment, recorded a 2.5% increase in sales driven by a 1.8% rise in local currency and a 0.7% growth in foreign exchange. During the quarter, the dental consumable merchandise sales increased 2.1% while dental equipment sales and service revenues declined 2.1% in local currency.

The company witnessed Dental consumable merchandise sales growth on the back of consistent patient visit to dental offices while Dental equipment sales and service revenues were impacted by a tough environment for capital equipment purchases.

The marginal 2.6% upside in medical sales reflected 9.9 million doses of seasonal influenza vaccines compared with 11.2 million doses in the prior-year quarter. However, after excluding sales of seasonal influenza vaccines from both the quarters, medical sales increased 8.1% year over year banking on market share gains.

The company’s animal health segment witnessed a 9.4% increase in revenues during the quarter primarily attributable to growth in companion animal and equine space and improved customer relationships.

Revenues from the international market surged 28% from the year-ago period, including a 15.2% growth in local currency and a 12.8% upside in foreign exchange.

Although the company witnessed strong revenue growth across all its segments, gross margin declined 50 basis points (bps) to 27.8% due to a 12.4% rise in cost of sales. Moreover, an 11% rise in selling, general and administrative expenses led to a 47 bps dip in operating margin to 6.8%.

Henry Schein exited the quarter with cash and cash equivalents of $106.8 million, compared with $150.3 million at the end of December 2010. During the reported quarter, the company repurchased 1.6 million shares and had $167.5 remaining for future repurchases.

Outlook

Henry Schein reaffirmed its EPS guidance of $3.92−$3.98 for fiscal 2011.

The company also provided EPS guidance for fiscal 2012. Henry Schein expects EPS of $4.25−$4.34, representing growth of nearly 8%−10% compared with the midpoint of 2011 guidance. The Zacks Consensus Estimate of $4.34 is at the upper end of the company forecast.

The company continues to drive strong top-line growth and establish broad domestic and international footprint in dental, vet, and medical supply distribution.

However, competition remains tough. While Henry Schein's primary competitors in the Dental market are Patterson Companies Inc. (PDCO) and McKesson Corporation (MCK). Currently, Henry Schein retains a short-term Zacks#3 Rank (Hold), which also corresponds to our long-term ‘Neutral’ recommendation on the stock.

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