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Why Is Henry Schein (HSIC) Up 20% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Henry Schein (HSIC). Shares have added about 20% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Henry Schein due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Henry Schein Q1 Earnings and Revenues Top Estimates

Henry Schein reported adjusted earnings per share from continuing operations of 94 cents in the first quarter of 2020, up 17.5% year over year. Adjusted earnings per share also beat the Zacks Consensus Estimate by 28.8%. The quarter’s adjustments exclude the impact of certain restructuring charges among others.

The solid year-over-year earnings improvement came on the back of solid revenue growth across two of its operating segments as well as a decline in operating expenses.

Revenues in Detail

Henry Schein reported net sales of $2.43 billion in the first quarter, up 2.9% year over year. The metric beat the Zacks Consensus Estimate by 4.9%. The year-over-year improvement came on the back of 4% growth in local currencies. In local currencies, internally generated sales increased 2.1% and acquisition growth was 1.9%. However, unfavorable foreign currency exchange made a 1.1% impact on the top line.

Excluding product sales to Covetrus under the transition services agreement related to Henry Schein’s Animal Health spin-off, internal sales growth in local currencies was 1.8%.

In the quarter under review, the company recorded sales of $1.78 billion in the North American market, up 5.6% year over year. Sales totaled $648.9 million in the international market, down 3.7% year over year.

Segment Analysis

Henry Schein derives revenues from three operating segments — Dental, Medical, and Technology and Value-added Services.

In the first quarter, the company derived $1.48 billion of global Dental sales, down 4.6% year over year. This includes 3% decline in local currencies and 1.6% adverse impact of foreign currency exchange. At local currencies, internally-generated sales declined 3.7% and acquisition growth was 0.7%. The 3.7% internal decline in local currencies included a decrease of 3.9% in North America and a drop of 3.4% internationally.

North America dental sales were in line with the company’s expectations for the first two months of the quarter. However, since March dental consumable merchandise and equipment internal sales were adversely impacted by suspension of non-emergency procedures in response to the coronavirus outbreak. Internationally also, the revenue picture remains the same, with significant impacts in Europe and China.

Global Medical revenues, however, climbed 17.1% year over year to $800.7 million resulting from 17.2% growth in local currencies. In local currencies, internally-generated sales grew 13.4% and acquisition growth was 3.8%. Unfavorable foreign currency exchange made a 0.1% impact.

The business registered strong organic growth as well as an increase of personal protective equipment (PPE) sales in March.

Revenues from global Technology and Value-added Services grew 14.2% to $131.9 million. This included 14.5% growth in local currencies and a 0.3% drop owing to adverse currency translation. At local currencies, internally-generated sales grew 6.4% and acquisition growth was 8.1%.

The revenue uptick resulted from positive trends in recurring revenue associated with the company’s practice management, patient engagement and patient demand creation software solutions. However, the segment was negatively impacted since mid-March due to material impacts on sales in these categories, new system installations, DentalPlans.com and financial services businesses.

Margin Trend

In the reported quarter, gross profit totaled $746 million. Gross margin contracted 113 basis points (bps) to 30.7% on a 0.8% fall in gross profit.

Selling, general and administrative expenses reduced 1.3% to $567.4 million in the quarter under review.

Overall adjusted operating profit was $178.7 million, up 0.9% year over year. However, adjusted operating margin contracted 15 bps year over year to 7.4%.

Financial Position

The company exited the first quarter of 2020 with cash and cash equivalents of $617.4 million compared with $106.1 million at the end of 2019.

The company temporarily suspended its acquisition activity and share repurchase program in March. However, prior to this, the company repurchased 1.2 million shares of its common stock during the first quarter. Per Henry Schein, as of today, it has $201.2 million authorized and available for stock repurchases.

At the end of the first quarter, net cash flow from continuing operations was $90.8 million compared with $133.3 million in the year-ago period.

2020 Guidance Withdrawn

The company had initially provided its financial guidance for 2020 during its fourth-quarter earnings release on Feb 20, where it specifically noted that guidance did not assume any significant supply chain disruption related to COVID-19.

However, on Apr 6, Henry Schein announced the withdrawal of the previously-announced guidance given the growing impact of COVID-19 on its business and customers. As the uncertainty of the pandemic and its impact on business operations cannot be ascertained at present, the company is not issuing any new financial guidance for the year at present.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month. The consensus estimate has shifted -145.87% due to these changes.

VGM Scores

Currently, Henry Schein has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Henry Schein has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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