Henry Schein (HSIC) Tops Q3 Earnings, Sales Meet, Guides '17

Henry Schein, Inc. (NASDAQ:HSIC) reported adjusted earnings per share (EPS) of $1.68 in the third quarter of 2016, up 8.4% year over year. Adjusted EPS also surpassed the Zacks Consensus Estimate of $1.65. The year-over-year earnings improvement was driven by strong revenue growth in the quarter.

Including one-time adjustments, Henry Schein’s reported net income in the third quarter was $133.7 million or $1.63 per share, reflecting year-over-year growth of 4.7% and 7.2%, respectively.

Revenues in Detail

Henry Schein reported revenues of $2.865 billion in the third quarter, up 6.7% year over year but almost in line with the Zacks Consensus Estimate. The year-over-year improvement came on the back of 7.7% growth in local currencies, with a 6% and 1.7% rise in internal sales and acquisitions, respectively. However, unfavorable foreign currency exchange accounted for a decline of 1% in overall revenue growth.

Region wise, Henry Schein experienced 7.3% year-over-year sales growth in the North American market, while sales in the international market improved 5.2%.

Segment Analysis

Henry Schein derives revenues from four operating segments: Dental, Medical, Animal Health, and Technology and Value-added services.

In the third quarter, the company derived $1.3 billion in revenues from global Dental sales, up 5.1% year over year (including local currency growth of 5.6% and a 0.5% decline owing to unfavorable foreign exchange). Local currency growth comprised acquisition growth of 1.7% and internal sales growth of 3.9%. The company’s decision to stop selling low-margin precious metals earlier this year negatively impacted growth by approximately 50 basis points (bps). According to the company, while the domestic dental consumable merchandise market continued to reflect slower than historical growth, it appears to be stable.

The company's global Animal Health segment witnessed a 7.9% improvement in revenues to $790.3 million (including local currency growth of 10.6% and a 2.7% decline related to foreign exchange headwind). The local currency growth included 8.6% growth in internal sales and 2% acquisition growth.

Worldwide Medical sales scaled up 7.1% year over year to $639.6 million based on local currency growth of 7.1%. Foreign currency exchange had no impact on this segment’s revenue growth in the third quarter.

Revenues from global Technology and Value-added Services grew 16.7% to $104.7 million. This included an 18.3% rise in local currencies, with acquisition growth of 10.7% and internal sales improvement of 7.6%. However, revenues at this segment declined 1.6% due to unfavorable foreign currency.

Margin Trends

Gross profit increased 5.4% to $789.5 million in the reported quarter. However, gross margin declined 33 bps from the year-ago quarter to 27.6%, due to a 7.1% rise in cost of sales, higher than the revenue growth rate.

Backed by a 5.8% rise in selling, general & administrative expenses to $583.4 million, adjusted operating income improved 4.4% year over year to $206.1 million. However, adjusted operating margin declined 15 bps to 7.2% in the reported quarter.

Financial Position

Henry Schein exited the quarter with cash and cash equivalents of $76.1 million, compared with $63.6 million at the end of second-quarter 2016. Year-to-date net cash flow from operating activities was $350.9 million, compared to the year-ago equivalent of $288.5 million.

During the quarter under review, the company bought back approximately 1.2 million shares for $193 million. On Oct 19, 2016, Henry Schein announced that its board of directors authorized the repurchase of up to $400 million of shares. This program is in addition to the $400 million repurchase program announced in Dec 2015.

Guidance

Henry Schein reiterated its adjusted EPS guidance for 2016. The company still expects to deliver adjusted EPS in the range of $6.55–$6.60, reflecting 10–11% year-over-year growth. The Zacks Consensus Estimate for 2016 is $6.57, within the company's guided range. The company also expects current restructuring activities to be completed in 2016.

Management also provided its full-year 2017 EPS guidance. The company expects EPS in the band of $7.17−$7.30, reflecting annualized growth of 9%−11%.

Our Take

Henry Schein ended the third quarter of 2016 on a mixed note with earnings handily beating the Zacks Consensus Estimate and revenues in line with the mark. The company’s strong share gains in both the North American and overseas markets along with the strong revenues raise optimism.

However, despite each segment posting strong sales growth, we are disappointed with respect to the company’s EPS guidance for 2016 which remained unchanged. The year-over-year deterioration in Henry Schein’s gross and operating margin stemming from higher cost of sales and expenses also concerns us. Meanwhile, foreign currency fluctuations continued to hamper the company’s business.

Zacks Rank & Key Picks

Henry Schein currently holds a Zacks Rank #2 (Buy). Other well-ranked medical stocks are GW Pharmaceuticals plc (NASDAQ:GWPH) , Baxter International Inc. (NYSE:BAX) and Bovie Medical Corporation (NYSE:BVX) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 67.5% year to date compared to the S&P 500’s 3.3% over the same period. The company’s four-quarter average earnings surprise is 41.6%.

Baxter international rallied 22.91% year to date, above the S&P 500’s 3.3%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 20.1% gain in the past one year, above the S&P 500’s 2.4%. The company has a trailing four-quarter average earnings surprise of 6.3%.

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