Note: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings
Prev. Ed.: Apr 5, 2013; 4Q12 and FY12 Earnings (broker material as of Feb 25, 2013)
Brokers’ Recommendations: Positive: 54.5% (6 firms); Neutral: 27.3% (3); Negative: 18.2% (2) Prev. Ed.: 6, 3; 2
Brokers’ Target Price: $43.00 (↓$0.33 from the previous report, 6 firms) Brokers’ Avg. Expected Return:2.3%
*Note: Though dated Jun 12, 2013, share price and broker materials are as of May 13, 2013.
*A Flash Update was provided on May 10, 2013.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Dentsply International, Inc. (XRAY) is the largest professional dental products company in the world. It manufactures innovative, high quality, and cost effective dental products. The company enjoys a leading position in terms of worldwide market share in the major product categories, in which it competes.
Out of the 11 firms providing ratings on Dentsply, 6 (54.5%)firms conferred positive ratings, 3 (27.3%) provided neutral ratings, while 2 (18.2%) assigned a negative rating on the stock.
Positive or equivalent outlook (6/11 firms): Despite weak 1Q13 results,the bullish firms believe that Dentsply has considerable scope to deliver double-digit bottom-line growth in FY13 and beyond. They believe that the reasons that led to the shortfall in 1Q13 were mainly temporary glitches that will not affect the future operations. The firms are confident that an improving U.S. economy should bolster growth for the company. According to the bullish firms, end-market condition in the global dental market is stable and is likely to improve going forward.
The bullish firms note that Dentsply, being a market leader in several of its product lines, is strengthening its market position by continuously launching new products, some of which are developed internally and others through its numerous tuck-in acquisitions. The firms also feel that the company will be able to recapture its share in orthodontics over the next two years based on its increased sales/marketing initiatives and investment in infrastructure. The re-launch of the orthodontics product line is already contributing to internal growth and is likely to drive top-line growth in FY13. Further, cost synergies from the ongoing Astra Tech integration is progressing smoothly as reflected in the company’s improving margins. In addition, the bullish firms are also encouraged by management’s clear understanding of the current market situation and its vision for a service-focused strategy to leverage shareholder return. Additionally, with debt level expected to normalize in the near-term, bullish firms believe that Dentsply is well positioned to leverage investor confidence via acquisitions and share buybacks.
Overall, the firms believe that a strong new product cycle, leading market position in dental consumables, improving market fundamentals, strong execution, synergies of the Astra Tech acquisition, emerging market growth and eventual resumption of the Japanese orthodontic business, should drive organic revenues and earnings growth and enable the company to outperform the market in the coming years.
Neutral and Negative or equivalent outlook (5/11 firms): Theneutral firms remain unimpressed with Dentsply’s disappointing 1Q13 results. However, the firms note that temporary one-time expenses such as fewer selling days and implant integration process in Germany led to the bottom line shortfall in 1Q13. Continued austerity measures in Southern Europe along with softness in Northern Europe concerns the neutral firms. Although sales growth in the U.S. was stable, a sequential drop in Rest of the World (ROW) sales failed to offset the European weakness. They also remain concerned over management’s decision to lower guidance for FY13 because of weakness across the global dental market, particularly consumables and implants.
Bearish firms remain cautious about the company’s growth following traction in the dental implants market. Moreover, the Astra Tech acquisition has expanded Dentsply’s exposure to the sluggish global implants market. The company is in the process of re-launching its high-end ortho products, which it lost access to following the Japanese tsunami. Although the re-launch program of the orthodontics line is generating solid revenues, bearish firms are skeptical regarding tough competition from other players in the market. The aggressive pricing strategy of its competitors and uncertainty related to inventory purchasing pattern of dealers can prove to be headwinds for the company. Another concern is the increased impact of foreign exchange rate fluctuations on the financial performance of Dentsply. However, neutral firms believe that improvements in the tax structure should negate such foreign exchange headwinds. The firms are also of the opinion that the recent U.S. Supreme Court decision to introduce a 2.3% medical device tax under the Affordable Healthcare Act will adversely affect Dentsply’s margins. However, given the high brand loyalty, the company has passed on the cost to its customers by raising prices. Given the lack of near-term visibility, neutral firms are awaiting clearer indications of improving market trends.
Long-Term Outlook
Overall, the analysts have a positive long-term outlook on Dentsply. They believe the company’s diverse operating model and company-specific growth opportunities will lead to healthy performance in the coming years.
Jun 12, 2013
Overview
Dentsply International, Inc. (XRAY) is one of the leading dental consumables and equipment companies. It designs, develops, manufactures and markets a broad range of products, such as dental prosthetics, precious metal dental alloys, dental ceramics, endontic instruments and materials, prophylaxis paste, dental sealants, ultrasonic scalers and crown and bridge material. Dentsply is a leading manufacturer and distributor of dental x-ray equipment, dental hand pieces, intraoral cameras, dental x-ray film holders, film mounts, and bone substitute/grafting material. The company is also a leading manufacturer and distributor of dental injectable anesthetics, impression material, orthodontic appliances, dental cutting instrument and dental implants. The company website is Dentsply is headquartered in York, Pa.
Principal Products
Dentsply derives its revenue from 4 major product categories: Dental Consumable Products, Dental Laboratory Products, Dental Specialty Products and Consumable Medical Device Products.
Dental Consumable Products
Dental Consumables consists of dental sundries and small equipment products used in dental offices for the treatment of patients. Dentsply products in this category include dental injectable anesthetic, prophylaxis paste, dental sealant, impression material, restorative material, tooth whitener, and topical fluoride. The company manufactures thousands of different consumable products marketed under more than a 100 brand names. Its small equipment products consist of various durable goods used in dental offices for the treatment of dental patients. Dentsply’s small equipment products include high- and low-speed hand pieces, intra-oral curing light systems, and ultrasonic scalers and polishers.
Dental Laboratory Products
Dentsply’s products in this category consist of dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics, crown and bridge material, and small equipment products used in laboratories, consisting of computer-aided machining (CAM) ceramics systems and porcelain furnaces.
Dental Specialty Products
Specialty Dental products are used for specific purposes within the dental office and laboratory settings. The company’s products in this category include endodontic (root canal) instruments and materials, dental implants, bone grafting materials, 3D digital implantology, dental lasers and orthodontic appliances and accessories.
Consumable Medical Device Products
Consumable medical device products consist mainly of urological products including catheters, certain surgical products, medical drills and other non-medical products.
Brokerage firms identified the following factors for evaluating the investment merits of XRAY:
Key Positive Arguments / Key Negative ArgumentsDentsply is the market leader in dental products. Its U.S. ranking varies between first and second across all its product categories. / The company is facing a challenging global dental implants market, especially in Europe.
The launch of new products is driving internal sales growth. / Although end-user demand in the dental industry is typically consistent, the timing of dealer inventory purchases could create variability in XRAY’s quarterly growth rates.
The company has an aggressive acquisition strategy. The recent acquisition of Astra Tech has doubled its presence in the dental implant market and provided opportunities for profit expansion. / The company is aggressively re-launching its high-margin ortho products following the Japanese tsunami. Failure or delay in product launch or loss of market share might affect the top line.
Stepped-up sales and marketing initiatives are expected to help Dentsply regain ground in orthodontics over the next couple of years. / Fluctuations in foreign exchange rates and the recently implemented medical device tax are affecting margins.
Note: The company’s fiscal yearcoincides with the calendar year.
Jun 12, 2013
Long-Term Growth
The dental industry is benefiting from many evolving long-term trends, including the increasing worldwide population, a growing population of adults aged 65 and above (a section with greater dental needs and the discretionary income to pay for both required and aesthetic dental procedures) and the longer retention of natural teeth.
The company is focusing on shifting to higher value-added products that carry greater margins, and is beginning to experience operating advantage from its long-term operating saving opportunities. in the long run, the analysts believe Dentsply would be able to leverage its distribution and marketing platform and research and development capabilities to sell higher value-added products, which will raise its margins and lead to stronger cash flow. Over the years, the company has been a leading consolidator of the fragmented dental market. The recently acquired Astra Tech business is expected to accelerate organic sales and earnings growth, as well as offer considerable margin expansion opportunities over the next 3-5 years. Additionally, the company has considerable scope to expand into the under penetrated emerging markets to boost its top line.
However, the company had lost access to most of its high margin offerings following the tsunami in Japan in 2011. Although the company is aggressively re-launching its ortho products, the entire process will take a couple of years to win back its lost clientele. Bearish firms are aware of the risks associated with such a program are concerned that the company might lose market share to competitors incase of delays.
Jun 12, 2013
Target Price/Valuation
The Zacks Digest target price ranges from $35.00 to $48.00, with average target price of $43.00 (↓ $0.33 from the previous target price; up 2.3% from the current price. Out of the 11 firms covering the stock, 6 provided positive ratings; 3 assigned neutral ratings and 2 firms rendered the stock negative.
Rating DistributionPositive / 54.5%
Neutral / 27.3%
Negative / 18.2%
Avg. Target Price / $43.00↓
Digest High / $48.00
Digest Low / $35.00↓
No. of Analysts with Target Price/Total Analysts / 6/11
Upside from Current / 2.3%
Maximum Upside from Current / 14.2%
Minimum Downside from Current / 16.7%
Risks to the price target include slower-than-expected recovery of the global dental market (especially dental implants), uncertainty associated with orthodontic supplies in Japan, heavy international exposure, sensitivity to dealer purchasing trends, sustained weakness in lab business, potential margin pressure and integration risks related to acquisitions.
Recent Events
On May 9, 2013,Dentsply reported 1Q13 results. Highlights are as follows:
- Net sales were $732.1 million in 1Q13, up 2.2% y/y. Net sales, excluding precious metal content, increased 1.1% y/y (up 1.7% in constant currency) to $672.6 million.
- Adjusted EPS was $0.52 in 1Q13, flat y/y. GAAP EPS was $0.49 in 1Q13 versus EPS of $0.37 in 1Q12.
Revenue
The company reported 1Q13 net sales of $732.1 million, up 2.2% y/y. Net sales (excluding precious metals) were $672.6 million, up 1.1% y/y (up 1.7% in constant currency) against a strong comparable year-ago period. The company had two less selling days in 1Q13. Healthy internal sales across all regions led to y/y growth. The Zacks Digest average total revenue in 1Q13 was in line with the company’s report.
In 1Q13, the internal growth for Dentsply came in at 1.6% y/y. Internal growth was negatively affected by 2 less selling days. Internal growth, excluding Orthodontics and Japan, was 1.3% y/y in 1Q13, reflecting an above market performance in the global dental consumable market, given a challenging macroeconomic condition.
Provided below is a summary of revenues as compiled by Zacks Digest:
$ in million / 1Q12A / 2012A / 1Q13A / 2Q13E / 3Q13E / 4Q13E / 2013E / 2014EDigest High / $716.4 / $2,928.4 / $732.1 / $793.3↓ / $735.8↓ / $789.2↓ / $3,050.5↓ / $3,178.5↓
Digest Low / $716.4 / $2,928.4 / $732.1 / $780.6↓ / $715.7↓ / $756.9↓ / $2,985.2↓ / $3,078.4↓
Digest Average / $716.4 / $2,928.4 / $732.1 / $787.6↓ / $727.5↓ / $775.4↓ / $3,022.6↓ / $3,128.3↓
Geographical Breakdown of Revenue
US revenue: Net sales, excluding precious metal content, increased by 1.9% in 1Q13 on a constant currency basis, led by internal sales growth in dental specialty, consumable medical device and dental laboratory products.
Europe revenue: Net sales (excluding precious metal content) increased by 1.0% in 1Q13 on a constant currency basis, including 0.8% of internal sales growth. The internal growth was driven by increased demand for dental specialty, dental consumable and consumable medical device products partially offset by lower sales of dental laboratory products and lower implant volumes in Germany due to the integration of the implant businesses.
In FY12, the company initiated several restructuring plans primarily related to the closure and/or consolidation of certain production and selling facilities in Europe to better leverage the company’s resources by reducing costs and obtaining operational efficiencies.
The company is proceeding with the integration of its dental implant businesses, with two additional selling organizations, Germany and France, combined in 1Q13. Investments made in combining and training the sales force in these two markets reduced sales in 1Q13, but is expected to have a favorable impact on sales force execution in the future. Integration of country sales force organizations is now nearly complete, with only two additional countries remaining, which are expected to be combined in 2Q13.
Rest of the world (ROW) revenues: Net sales (excluding precious metal content) in the Rest of the World increased by 2.9% in 1Q13 on a constant currency basis, as internal sales grew on the back of increased demand for dental specialty, dental laboratory and consumable medical device products. Sales in Japan and Australia were soft. Neutral analysts believe that while the company is poised to gain from strong sales in developing nations, weakness in the Japanese ortho market will continue throughout FY13.
Provided below is a summary of segment revenues as compiled by Zacks Digest:
$ in million / 1Q12A / 2012A / 1Q13A / 2Q13E / 3Q13E / 4Q13E / 2013E / 2014EUnited States / $226.5 / $901.4 / $228.8 / $239.9↓ / $240.6↓ / $218.4↓ / $927.6↓ / $965.5↓
Europe / $306.2 / $1,215.4 / $309.4 / $326.9↓ / $289.0↓ / $327.0↓ / $1,252.3↓ / $1,286.1↓
ROW / $132.9 / $598.0 / $134.4 / $150.9↓ / $138.7↓ / $163.0↓ / $587.1↓ / $614.0↓
Provided below is a graphical representation of the revenue segments:
Please refer to the Zacks Digest spreadsheet on XRAY for further detail on revenue estimates.
Segment Discussion
Operating Segments
Dentsply’s reportable segments comprises its operating groups, which have been overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. During 1Q12, the company realigned reporting responsibilities for multiple locations due to changes in its management structure. Dentsply’s revised operating segments are as follows:
Dental Consumable and Laboratory Businesses
This business group designs, manufactures, sells and distributes certain small equipment and chairside consumable products in the U.S., Germany and certain other European regions. It is also responsible for most of the company’s non-dental offerings except healthcare products as well as dental lab products in almost all countries. In addition, this group sells and distributes certain Endodontic products in Germany.
Net sales (excluding precious metal content) were $212.0 million, flat y/y in 1Q13. Growth in dental consumables was offset by soft sales in the dental laboratory businesses primarily in Europe.
Orthodontics/Canada/Mexico/Japan
This group is responsible for the global manufacturing, sales and distribution of Dentsply’s Orthodontic products. It is also responsible for the sales and distribution of most of the company’s dental products in Japan, Canada and Mexico.
Net sales (excluding precious metals) were $65.0 million, up 2.7% y/y in 1Q13. On a constant currency basis, net sales, excluding precious metal content, increased 5.6% due to stronger dental specialty product sales primarily in the orthodontic businesses, partially offset by decreased sales in Canada.
Select Distribution Businesses
This business group markets most of the company's dental products in UK, France, Italy, Austria and certain other European countries, the Middle East, Africa and India.
Net sales (excluding precious metals) were $60.7 million, up 3.1% y/y in 1Q13. On a constant currency basis, net sales, excluding precious metal content, grew 3.7%. The growth was primarily led by higher demand in dental specialty and dental consumable products.
Implants/Endodontics/Healthcare/Pacific Rim
Most of Dentsply’s dental implant and related products are designed, manufactured, sold and distributed by this business group. In addition, this group sells Endodontic products in the U.S., Switzerland, Germany, Asia and other locations not covered by other selling divisions. Further, certain dental consumables and dental laboratory products produced under this group are marketed in Brazil, Latin America (excluding Mexico), Australia and most of Asia (excluding India and Japan). Additionally, the group is in charge of the worldwide design, manufacturing, sales and distribution of the company’s healthcare products (non-dental).