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Why Is Henry Schein (HSIC) Down 2.2% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Henry Schein (HSIC). Shares have lost about 2.2% in that time frame, underperforming the S&P 500.

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

Henry Schein Q2 Earnings Beat Estimates

Henry Schein, Inc.  reported adjusted earnings per share (EPS) from continuing operations of 84 cents in the second quarter of 2019, up 10.5% year over year. Adjusted EPS beat the Zacks Consensus Estimate by 1.2% on revenue growth across global Medical and Technology and Value-added Services businesses.

On a reported basis, EPS from continuing operations was 78 cents, showing an 8.3% improvement on a year-over-year basis.

Revenues in Detail

Henry Schein reported net sales of $2.45 billion in the second quarter, up 5.6% year over year. The metric missed the Zacks Consensus Estimate by 1.2%. The year-over-year improvement came on the back of 3.5% internal sales growth in local currencies along with acquisition growth of 4.3%. The top line was adversely impacted by 2.1% owing to unfavorable foreign currency exchange.

Excluding $23.9 million in corporate revenues from product sales to Covetrus under the transition services agreement related to Henry Schein’s Animal Health spin-off, normalized internal sales growth in local currencies was 2.4%.

In the quarter under review, the company recorded sales of $1.76 billion in the North American market, up 7.5% year over year. Sales totaled $683.8 million in the international market, up 1.4% year over year.

Segment Analysis    

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

In the second quarter, the company derived $1.60 billion of global Dental sales, down 0.7% year over year. This includes 2.1% growth in local currencies and 2.8% adverse impact from foreign currency exchange. At local currencies, internally-generated sales increased 0.7% and acquisition growth was 1.4%.

Worldwide Medical revenues climbed 13.6% year over year to $697.6 million. Growth in local currencies was 13.8% while there was a 0.2% decline related to foreign exchange headwind.

Revenues from global Technology and Value-added Services grew 39.9% to $125.1 million. This included 41.2% growth in local currencies and 1.3% decrease owing to adverse currency movements.

Margin Trend         

Gross profit increased 6.8% to $767.4 million in the reported quarter. Gross margin expanded 34 basis points (bps) from the year-ago quarter to 31.4%.

The company reported a 7.3% rise in selling, general & administrative expenses to $593.2 million in the second quarter. However, adjusted operating income improved 5.2% year over year to $174.2 million. Adjusted operating margin contracted 3 bps to 7.1%.

Financial Position

The company exited second-quarter 2019 with cash and cash equivalents of $84.9 million, compared with $88.1 million at the end of the first quarter. Year-to-date net cash provided by operating activities from continuing operations was $298.8 million compared with 111.9 million in the year- ago period.

During the quarter under review, Henry Schein repurchased 1.2 million shares of its common stock for approximately $77 million. At the end of the second quarter, the company had $173 million authorized for repurchase of common stock.

2019 Guidance

The company reaffirmed its EPS guidance for 2019. It expects adjusted EPS in the range of $3.38-$3.50, reflecting 7-10% growth from 2018. The Zacks Consensus Estimate for 2019 adjusted EPS of $3.46 is within the guided range.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

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

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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