On Dec 31, we issued an updated research report on DENTSPLY International Inc. (XRAY). In our opinion, an innovative product pipeline serves as a key growth catalyst for DENTSPLY. However, stiff competition and an unfavorable exchange rate are major headwinds for the company in the near term.
DENTSPLY is benefiting from the gradual recovery of the economy in the U.S. and Western Europe. Going forward, stable U.S. and European dental markets are expected to help better the company’s top-line growth. Also, emerging markets like Asia-Pacific & the Middle East/Africa provide huge opportunities for DENTSPLY. These markets are vastly untapped with low dental products penetration.
Product innovation has remained a key growth strategy for the company. The company’s solid internal growth, despite challenging macroeconomic headwinds, is primarily driven by its range of innovative products. We feel DENTSPLY’s diversified product portfolio and recurring revenue base are key growth catalysts in the long run.
DENTSPLY also remains focused on improving its cost structure that should help it achieve its 20% operating margin target by 2017. The company also plans to consolidate or reduce certain low-margin product lines, which will improve asset turns and overall return on invested capital (ROIC). The cost curtailment initiatives coupled with strong cash flow generation makes it an attractive prospect for investors.
Despite all the positives, a gloomy macroeconomic environment continues to hurt the company. Volatility in the CIS region, particularly in Russia and Ukraine, does not bode well for DENTSPLY. Brazil and Japan, too, continue to provide substantial challenges.
We feel DENTSPLY, with significant international presence, is going to be hurt by unfavorable currency volatility. A strengthening U.S. dollar, especially against the euro, remains a major concern in the near term.
Moreover, intensifying competition from peers inflict pricing pressure on DENTSPLY, resulting in a significant headwind.
Zacks Rank
Currently, DENTSPLY carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth a look in the Medical/Dental-Supply space are Bio-Reference Laboratories (BRLI), Align Technology (ALGN) and AmerisourceBergen (ABC). While Bio-Reference Lab sports a Zacks Rank #1 (Strong Buy), Align Technology and AmerisourceBergen hold a Zacks Rank #2 (Buy).
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