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Henry Schein (HSIC) Tops Q1 Earnings, Keeps '16 View

Henry Schein, Inc. HSIC reported adjusted earnings per share (EPS) of $1.41 in the first quarter of 2016, up 10.2% year over year. Adjusted EPS also exceeded the Zacks Consensus Estimate by a couple of cents. The year-over-year earnings improvement was driven by record revenue growth in the quarter.

Including one-time adjustments, Henry Schein’s reported net income in the first quarter was $113.8 million or $1.37 per share, reflecting a year-over-year improvement of 10% and 12.3%, respectively.

Revenues in Detail

Henry Schein reported revenues of $2.713 billion in the first quarter, up 10.1% year over year. The top line also comfortably beat the Zacks Consensus Estimate of $2.658 billion. The year-over-year improvement was led by 12% growth in local currencies with a 9.3% and a 2.7% rise in internal sales and acquisitions, respectively. However, unfavorable foreign currency exchange accounted for a decline of 1.9% in overall revenue growth.

Region-wise, Henry Schein experienced 13.4% year-over-year sales growth in the North American market, while sales in the international market improved 3.9%.

Segment Analysis    

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

In the first quarter, the company derived $1.3 billion in revenues from global Dental sales, up 4.1% year over year (including local currency growth of 6.1% and a 2% decline owing to unfavorable foreign exchange). Local currency growth comprised acquisition growth of 1.2% and internal sales rise of 4.9%. The Dental franchise witnessed an improvement of 5.8% in North America while international sales grew 1.3%.

The company's global Animal Health segment witnessed a 12.7% improvement in revenues of $771.4 million (including local currency growth of 15.6% and a 2.9% decline related to foreign exchange headwind). The local currency growth included 9.8% growth in internal sales and 5.8% acquisition growth. Franchise revenues grew 18% in North America while overseas revenues improved 7.5%.

Worldwide Medical sales scaled up 21.3% year over year to $538.1 million based on local currency growth of 21.5%. However, revenues slipped 0.2% owing to unfavorable foreign currency exchange. The local currency growth was solely driven by 21.5% growth in internal sales.

Revenues from global Technology and Value-added Services grew 18.6% to $101.7 million. This included a 19.9% rise in local currencies, with acquisition growth of 12.4% and internal sales improvement of 7.5%. However, revenues at this segment declined 1.3% due to unfavorable foreign currency.

Margin Trends

Gross profit increased 9.2% to $779.3 million in the reported quarter. However, gross margin dropped 30 basis points (bps) from the year-ago quarter to 28.7%, due to a higher rate of rise in cost of sales compared to revenue growth.

Despite a 9.9% rise in selling, general & administrative expenses to $599.1 million, adjusted operating income improved 7.1% year over year to $180.3 million on account of higher gross profit. However, adjusted operating margin declined 20 bps to 6.6% in the reported quarter as the rise in operating expense was more than that in gross profit.

Financial Position

Henry Schein exited the quarter with cash and cash equivalents of $71.6 million, compared with $72.1 million at the end of 2015. In the first quarter, net cash outflow from operating activities was $101.5 million, compared to the year-ago equivalent of $26.7 million. 

During the quarter under review, the company bought back approximately 0.7 million shares for $100 million and was left with $300 million worth of repurchase authorization.

Guidance

Henry Schein reaffirmed its adjusted EPS guidance for 2016. The company continues to project adjusted EPS at $6.55–$6.65, reflecting 10%–12% year-over-year growth. The Zacks Consensus Estimate for 2016 is $6.62, within the company's guided range.

Our Take

Henry Schein kick-started 2016 on an impressive note, with its first-quarter top and bottom line beating the Zacks Consensus Estimate. The company’s strong share gains in both North American and overseas markets along with the record revenues raise optimism. This in turn drove the robust double-digit growth in the company’s adjusted EPS figure.

However, we remain on the sidelines with respect to the company’s unchanged adjusted EPS guidance for 2016 despite each segments posting strong sales growth. The year-over-year deterioration in Henry Schein’s gross margin figure also disappoints us. Meanwhile, foreign currency fluctuations continued to hamper the company’s business.

Nevertheless, the recent acquisitions of VetStreet and RxWorks add to the company’s strength. These efforts reflect the company’s strong cash balance and its ability to finance buyout deals. We expect these investments to not only enhance the company’s geographic presence but also boost its business.

Zacks Rank & Key Picks

Currently, Henry Schein carries a Zacks Rank #3 (Hold). Better-ranked medical stocks are Baxter International Inc. BAX, Align Technology Inc. ALGN and Boston Scientific Corp. BSX. While Baxter sports a Zacks Rank #1 (Strong Buy), Boston Scientific and Align carry a Zacks Rank #2 (Buy).

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BOSTON SCIENTIF (BSX): Free Stock Analysis Report
 
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HENRY SCHEIN IN (HSIC): Free Stock Analysis Report
 
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