Dental Industry Braces For a Fall - Barron's

The long-term outlook is good for Henry Schein and Patterson Cos., the two largest publicly traded dental-product distributors, but investors shouldn't jump in just yet. With softness expected in nonessential dental work for the next couple of years, Barron's says investors should wait to pick up the relatively pricey stocks at a discount.

A large part of dental spending is discretionary, including cosmetic procedures like teeth-whitening and non-emergency procedures like replacing a crown. According to a recent survey, 33% of respondents said they were delaying dental care because of the costs and as the jobless rate continues to rise, this number will likely grow as well.

Combined, Henry Schein (HSIC) and Patterson (PDCO) control roughly 70% of a $7B North American market. Both have expanded into medical and animal-health products, but still rely heavily on their dental units.

Patterson had a rough Q4, with dental division sales falling 5% to $533.5M. Sales of dental equipment and software fell 10%, and consumables fell 3%. The company promised to fight the slippage, but that won't be easy if revenue remains under pressure (it was flat in Q4). Patterson CFO R. Stephen Armstrong told Barron's that "a further rise in unemployment of 1 or 2 percentage points would probably not have a dramatic impact" on business, though the company is being cautious during the first half of the year. Patterson trades at 12 times estimated FY '10 profit of $1.73/share.

Schein's profit rose in Q1, even though sales fell 2.2%. Dental sales were down 2.4%, consumables were up 1% and equipment slid 5.1%. Despite the slips, net income rose on cost-cutting and Schein reaffirmed its FY '09 estimates of $3.11-3.26 a share, up 7-12% from 2008. Cost-cutting can only go so far, however, if revenue remains soft.

Schein and Patterson will do better when the economy recovers, but that's still a year or two away. Investors should consider holding off in the meantime.

Comments

[TAS:]

This information fills a cavity in my portfolio. I'll get a grip on this point of view and use her wisdom to extract profits, so long as I don't bite off more than I can chew.

Jun 28 09:27 AM

[mdpath:]

I wonder why XRAY wasn't mentioned in the article.

Jun 28 11:53 AM

[Snitzer:]

TAS: I've got to learn how to write like that; kind of like Kangas the other day talking about a "brief report on Haynes". But I agree with her thesis; cosmetic dentistry is on hold, unless there is serious dental pain involved most people will be deferring any visits to the dentist.

Jun 28 12:20 PM

[TeresaE:]

Another consideration as I try to figure out how to absorb ANOTHER 22% increase in my employees' (and my own) health care plan: companies are going to cut benefits like never before. Easiest cut to make is dental insurance.

Michigan, which should be the ultimate example of how a "downturn" happens in this century (and is being completely ignored), has shown, first comes cuts in dental spending, then comes cuts in health spending. My doctor is as slow as my dentist.

After the effects of Cap & Trade and government health care hit our employers, our teeth are going to look as bad as the UKs.

With any luck the Chinese will start buying dental supplies--right before they ignore patents and make it themselves.

Jun 28 02:53 PM

[notsosmart:]

overhears@ dunkin doughnuts."my dentist wanted $25,000 for work & an implant.my relative in costa rica arranged the trip,dental care(all the work) a resonable place to stay & a short vacation.cost for all less than $15,000 on a credit card.further conversation-he is thinking of organizing dental trips for groups to make a living.a lot of surgery goes overseas already.with 45-50 mil uninsureds about to get coverage you can guess the service you will get.

Jun 28 03:48 PM

[437339:]

Re

Dentists are now making much more than cardiologists + endocrinologists + other specialists , somethings got to give . I agree with TheresaE

Jun 28 08:36 PM

[garboo:]

I don't know Rachael Granby, but I do know Henry Schein, as I have owned it for years. First, since RG's article is just a shorter repeat of a short Barron's article, I will comment on the Barron's version. The article is not well researched. It is heavily anecdotal and light on hard facts. It also focuses way too much on delayed discretionary dental work, which is 1) a relatively small slice of the overall pie, and 2) work that, in large part, will eventually get done. Both companies sell thousands of products that are not used directly on customer procedures, and both companies sell many thousands more products to medical and veterinary practices, as well. Most importantly, both articles miss what should be the real point, which is that, in good times and bad, HSIC has been performing better than PDCO, as clearly reflected in the side-by-side 1-year, 3-year and 5-year charts of the stock prices of the two companies. The reason, simply put, is that HSIC is a better company. Instead of painting both companies with the same brush, the authors should have been explaining to their readers why HSIC would be the better one to buy (low, now).

Jul 16 10:04 AM