Straumann: There Is Plenty Of Growth Ahead

|
About: Straumann Holding AG (SAUHF), Includes: DHR
by: Smart Dividend
Summary

Straumann is a high growth business with strong fundamentals.

I expect growth to accelerate further based on five industry and demographic trends.

Strong competitive positioning combined with high-quality financials and growth potential makes this company a BUY.

Thesis

Straumann Group (OTCPK:SAUHF) is a high-quality company that has been growing at a double-digit rate for the past several years and has the opportunity to maintain and even accelerate future growth. The growth will come from five industry and demographic trends from which the most significant is the under penetrated markets that the company operates in. The company has high valuations but they are completely justified by the current growth prospects so investors and analyst should remain bullish.

Business

Straumann is a global leader in tooth replacement, implant dentistry and different orthodontic solutions. It helps people to have better looking smiles and more confidence.

The group operates through several brands that develop, manufacture and supply dental instruments and implants as well as digital equipment, software and all kinds of dentistry products and solutions.

The company is headquartered in Basel, Switzerland but it operates all over the world. As of 2018 Europe remains the biggest market, Asia is the fastest growing one.

As of 2018 the company had the following distribution of revenue by country:

  • Europe, Middle East and Africa – 43%
  • North America – 29%
  • Asia/Pacific – 19%
  • Latin America – 9%

Source: annual report 2018

As you can see the company is very diversified across different geographic areas and currently grows at double digit rates all over the world. The highest growth is in Asia where the market is significantly under penetrated and has huge potential for contribution to top-line growth.

Industry

Hard work and innovation has been driving the growth of Straumann up to this point. From here on growth will come from several industry and demographic factors that I have listed below:

Demographics – more elderly people need tooth replacement as the population ages. In North America it has been forecasted that the number of Americans aged 65 and older is projected to more than double by 2060 and the 65-and-older age group’s share of the total population will rise to nearly 24 percent from 15 percent.

Affordability – the middle class is growing in developing countries which creates the need of more efficient and less costly products. This is why Straumann offers both premium and non-premium products and has been working on simpler products with removable features.

Awareness – patients are better informed about the negative effects of poor oral health.

Esthetics – the trend in people choosing cosmetic surgery and dental implants is growing as well as the number of trained dentist who are confident in placing implants.

Under penetrated markets – emerging markets remain significantly under penetrated due to the lack of qualified healthcare professional. Markets like China and India are especially attractive as they are characterized with high population and high dentistry needs. I find this trend to be the most significant of all.

Source: 2018 annual report

Based on those trends I think that SAUHF impressive revenue growth rate of over 20% in CHF can easily be maintained and it may even accelerate when the group makes a big entry into markets like India and China which up to this day remain under penetrated with high growth rates.

Source: annual reports

Financial Analysis and valuation

The group has a long history of delivering strong financial results. Revenues have been growing each year since 2014 resulting in an organic CAGR of 13%. Bottom line performance has been also impressive as it is strongly correlated with revenues and has been growing at double digit rates from 2016.

Source: annual report 2018

The group's gross margin has declined 3 pp since 2016 as a result of Straumann effort to diversify its product portfolio and less favorable business mix. Several investments have been made into lower-margin products like digital equipment and clear-aligner solutions. At the same time Net Income Margin was slightly lower due to one-off events in the past year.

Source: Annual reports

The decrease in NIM slightly decreased the ROE of the group but margins and ROE remain higher when compared to the closest competitors in the face of Danaher Corp (DHR) and OsstemImplant Co. This is a clear indicator that the company has a substantial competitive advantage in its industry.

Gross Margin TTM (%)

Net Margin TTM (%)

ROE (%)

Total debt to equity MRQ (%)

Straumann Holding AG

74.75

20.37

23.95

16.64

Danaher Corp

55.09

12.57

8.83

47.14

OsstemImplant Co Ltd

56.67

2.38

15.72

34.16

Source: Reuters.com

The high growth rates, margins, ROE and low debt has led to strong price performance which resulted into high multiples. Based on the peer group that I have created, Straumann shares appear to be relatively overvalued.

P/E TTM

P/S TTM

P/B MRQ

P/CF TTM

Straumann Holding AG

48.44

9.69

10.97

40.02

Danaher Corp

28.11

3.49

2.48

18.47

OsstemImplant Co Ltd

56.75

2.25

8.71

40.79

Source: Reuters.com

Speaking of valuation, analyst recommendations are often overlooked by many authors on SA (myself included). But professional analysts are also smart, hardworking people who often have in-depth knowledge of the industry, the business and the management team. Their models often are complicated Sum of the parts (SoTP) models with many assumptions in them and can be misleading but aggregating their recommendations to get an idea about the overall market sentiment can be helpful.

In the case with Straumann the majority of the analysts remain bullish.

Source: annual report 2018

Risks

Whenever we talk about a huge growth story we must also be mindful about the risks as nothing hurts more than a broken thesis.

Liquidity – there is very little trading on the OTC market in USD, just about a few shares per day. So if you want to trade this stock you should look to buy it on the Swiss exchange which is the most liquid market where shares are traded.

Currency – Trading on the Swiss exchange creates currency risks as you will have to open a position in CHF which will make your returns more volatile.

Also, the group operates in many countries all over the world so it has to adequately hedge its exposure to different currencies to minimize returns volatility.

Competition – Straumann’s main market is the implant dentistry where the group has been the undisputed leader with 25% market share over the past several years. However, competition is not that far behind as the market is divided among seven big names and the rest is divided by several hundred players so Straumann has to look out for both large players and smaller niche players.

Source: Annual report 2018

Trade wars – I really don’t consider trade wars to be a substantial risk for the group (although some of you might), in fact I see them more as an opportunity as this will weaken the position of US dental companies in China which will allow for a strong and fast-growing company like Straumann to take some market share from them.

High valuations – All investors like to buy growth at a reasonable price (GARP) but nowadays those opportunities are hard to find. In the case of Straumann we have an exceptional growth story that comes in slightly higher valuations. High multiples should always be at least a yellow flag for investors so I have included them as a risk even though I think that they are justified.

Conclusion

Straumann is a great business that is able to maintain a leading position and a high-growth rate in a very competitive industry through its premium and non-premium products in the field of implant dentistry. I expect the high growth rates to continue going forward due to several industry and demographic trends that the company is well positioned to take advantage of. Just like many other analysts I remain bullish on the company despite the high valuations as I see in Straumann a top-quality innovative business with lots of undiscovered potential.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.