Henry Schein Animal Health Spin-Off Approaches, Costs Mount (revised)

On Jan 17, we issued an updated research report on Henry Schein, Inc. (NASDAQ:HSIC) . The company carries a Zacks Rank #3 (Hold).

Over the past six months, Henry Schein has outperformed its industry. The stock has gained 8.4% against the 12.1% decline of the industry.

Apart from growth across all operating segments in the last reported quarter, Henry Schein's gains in the North American markets raise optimism on the stock. Year-over-year expansion in gross margin is also encouraging. We are looking forward to the company’s new exclusive distribution agreement with technology and clinical education company — Sprig Oral Health Technologies. Per the agreement, Henry Schein will distribute Sprig's products to help customers place crown on teeth.

Henry Schein’s decision to spin off its global Animal Health business sprang a surprise to investors. This business currently contributes nearly 30% to the company’s top line. Not only that, in the second quarter of 2018, this business witnessed a 10.6% rise in revenues to $985.9 million. Undoubtedly, the spin-off is expected to bring in major changes to Henry Schein’s overall operating results.

The new standalone public company that will result from the planned spin-off of the Henry Schein Animal Health business and the subsequent merger with Vets First Choice will be named Covetrus. Henry Schein is highly optimistic about this deal and believes the combined entity to create a new global leader in the growing animal health market. According to Henry Schein, this transaction will integrate the power of data analytics, digital communications, practice management software and supply chain expertise into a multi-channel platform.

We believe, this initiative remains integral to Henry Schein's 2018-2020 Strategic Plans for deepening focus on dental and medical businesses. Per the company, this transaction will enable it to drive new growth opportunities in dental space for delivering quality clinical care and advanced wellness and prevention. In line with this, the company already announced that it has entered the rapidly growing market for orthodontic aligners with its proprietary SLX Clear Aligner System.

Furthermore, post spin-off, Henry Schein expects EPS growth for the remaining consolidated business to vary from high single to low double-digit range.

On the flip side, escalating costs and expenses persist to be a drag on the company’s margins and the bottom line. A tough competitive landscape and pricing pressure also weigh on Henry Schein’s stock.

Key Stocks

Some better-ranked stocks in the broader medical space are Veeva Systems (NYSE:VEEV) , Amedisys, Inc. (NASDAQ:AMED) and Illumina, Inc. (NASDAQ:ILMN) .

Veeva Systems’ long-term earnings growth rate is estimated at 19.5%. The stock flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Amedisys’ long-term earnings growth rate is projected at 18.8%. The stock carries a Zacks Rank #2 (Buy).

Illumina’s long-term earnings growth rate is expected at 23.4%. The stock has a Zacks Rank of 2.

(NOTE: We are reissuing this article to correct a mistake. The original article, issued January 17, 2019, should no longer be relied upon.)

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