The Long Case for Dentsply

Stock Recommendation: BUY Dentsply (NASDAQ: XRAY)

Write (sell) the July Expiration $30.00 and $35.00 put options.

DENTSPLY International, Inc. engages in the design, development, manufacture, and marketing of dental consumables, dental laboratory products, and dental specialty products worldwide. Its dental consumable products include dental sundries, such as dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, bone grafting materials, tooth whiteners, and topical fluoride; and small equipment products, including high and low speed handpieces, intraoral curing light systems, and ultrasonic scalers and polishers used in dental offices for treatment of patients.

The company’s dental laboratory products include dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials, as well as equipment, including computer aided machining ceramic systems, and porcelain furnaces.

DENTSPLY’s specialty dental products include endodontic instruments and materials, implants and related products, and orthodontic appliances and accessories. Its products are used for specific purposes within the dental office and laboratory settings.

The company markets its products primarily to dentists, dental hygienists, dental assistants, dental laboratories, and dental schools. It distributes its products through domestic and foreign distributors, dealers, and importers, as well as directly through sales staff.

DENTSPLY was founded in 1983 and is headquartered in York, Pennsylvania. 

At Dentsply, we see consistent growth, in a Recession-proof Industry.

Dentsply shares are currently trading at some of the larger negative deviations from their 50-day and 100-day moving averages. Shares have been knocked down with the overall market, but since the beginning of the year have come down by 20%. We see a very good opportunity to buy this stock at a discount here.

The stock has been a consistent performer over the last few years, with regular dividends and occasional splits. The dividend itself is relatively small $0.18 per year, which is a yield of about 0.50%, but that’s better than nothing for many investors.

XRAY has a lot of little things like that to like about it; XRAY is starting to push into the $5.0 billion+ market cap range, and the CEO is a relatively young 49 years old. Last year he received roughly $600,000 a year in salary. The 46 year old COO and Executive VP is similarly compensated on a scale that can be described as frugal in this day and age of excessive CEO compensation.

The Company has a solid earnings history, with very little surprise factor in its quarterly earnings. Over the past years, earnings per share have grown right along with the top line revenue, and margins have stayed consistent at roughly 17% to 20% on the gross operating margin, and right around 10% to 12% on the profit margin. This has translated into growing earnings per share that will reach towards the $2.00 per share level in the year ending September 2008, according to analysts who follow the company.

Cash on the balance sheet is $316 million, which is enough to meet ongoing obligations in light of the nearly $2 billion per year in top line revenues that the company has built. On the liability side of the balance sheet, a level of $483 million in longer term debt has been built up, reflecting some leverage, but a manageable level with only $0.32 in debt per $1.00 of equity.

Lastly, XRAY derives a significant bulk of its revenues from international sales, which will benefit from the declining US Dollar. 

We have two recommendations here:

1) Buy XRAY stock at $37.00 or less today, March 19, 2008; or

2) Investors who have the ability to “write” or sell options and understand the risks associated with naked options positions should consider our second recommendation, which is writing puts.

We would recommend investors sell two strike prices of puts on XRAY, specifically in the July 2008 expiration. We would recommend selling the July 30 and 35 puts, which are currently at $0.35 and $1.35 bid, respectively. This will create an obligation (assuming 1 contract of each is sold) to buy 200 shares of XRAY at an average cost of $32.50. Offsetting that cost per share is the option premium we would take in, which is $1.70 per share (on average), leaving us a net cost per share for our XRAY investment of $30.80, assuming both contracts are exercised. If only the $35 puts are exercised, this will result in an average cost per XRAY share of $33.30.

Upon being assigned XRAY shares, we would then look to start writing covered calls on this stock at the $35 or higher level. We will make recommendations on that should these puts be executed.

Disclosure: At time of writing, analyst has no XRAY stock or options positions

Comments

[Yazz]

Do you think it's cheap? On what basis other than a decline from a prior high?