Dental Industry Braces For a Fall - Barron's

 |  Includes: HSIC, PDCO
by: Rachael Granby

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 (NASDAQ:HSIC) and Patterson (NASDAQ: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.