Dentsply Sirona Shines In Today's Bearish Environment

Summary

• Dentsply's financial performance is weaker compared to last year.
• The management is transparent and has provided a clear path toward a positive turnaround.
• It has an improving product portfolio, which will aid growth in its US operation.
• It remains fundamentally stable and has a growing dividend with a strong buyback catalyst.
• XRAY is a buy on today’s weakness.

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I previously covered Dentsply Sirona (NASDAQ:XRAY) back in May of 2022, and expected a lesser impact from management issues and foreign currency headwinds. With this, XRAY continues to be attractive despite the falling margin today. It recently announced a restructuring plan which will provide the company $200 million of annualized savings. The management expects this initiative to enhance profitability, accelerate digitalization, and help the company to position well in the growing global orthodontics market. Despite the weak financial performance today, management provided a reassuring outlook, making XRAY attractive.

Company Overview

XRAY formally announced its plan to restructure and as part of this initiative, management will incur necessary expenses, which is approximately $165 million in FY'23. With this, XRAY will implement the following:

XRAY: New Operating Model (Source: Q4 2022 Earnings Call Presentation)

The management expects that a reduction in the global workforce and simplification of the management team will provide operating efficiency for the company, leading to an estimated $200 million in annualized savings. This savings is expected to continue to drive growth for XRAY, such as by funding investments that will position the company better in its addressable market.

XRAY: Improving Product Portfolio (Source: Q4 2022 Earnings Call Presentation)

Today's weaker demand environment caused its total revenue to decrease from $4,231 million recorded in FY'21 to $3,922 million. XRAY has improved its product portfolio, which will expand opportunities in implants and aligners. In fact, XRAY recently launched a new product line in the US. This includes SureSmile VPro, SureSmile Retainers, and SureSmile Whitening Kit. All of these products are expected by the management to gain US market share. Overall, management sees operating synergies with its Byte acquisition in 2020 as quoted below.

Ortho doing much better on a top line, a big part of our margin expansion and improvement story is around the bottom line as well. And our Ortho businesses are becoming more profitable, both in SureSmile and in Byte. So that's also very encouraging relative to how we think about 2024, 2025, getting to higher operating margins, the EBITDA margins, our Ortho business should be a contributor to that and should be a nice tailwind when we go into 2024 for sure. Source: Q4 2022 Earnings Call Transcript

Additionally, management provided a strong CAPEX budget in FY'23 of 4% of total revenue. This is around $156 million out of expected total revenue amounting to $3.92 billion in FY'23.

XRAY: Weaker Profitability (Source: Q4 2022 Earnings Call Presentation)

Management remains optimistic about a positive turnaround of the company and is confident that the profitability slowdown is manageable and may pivot over time. While today's weak profitability may drag the stock lower, management remains optimistic that they have a liquid balance sheet and safe dividends.

We have a strong balance sheet, a low leverage ratio and healthy cash flow generation and expect full year 2023 free cash flow conversion of approximately 80%, which reflects the expected cash outlays to support our restructuring program. Our goal is to improve conversion to 100% once you move past the one-time cash outlays in 2023 through the organization and portfolio work that we discussed today as well as working capital and supply chain optimization. Source: Q4 2022 Earnings Call Transcript

I believe that XRAY's dividend is secure given its positive outlook. The company currently has a forward dividend yield of 1.43% up from its 5-year average of 0.88%, which is supported by a payout ratio of 24.94%, well below the 50% threshold. Furthermore, XRAY's growing earnings per share outlook is an encouraging sign. In addition, its total debt has been declining and currently stands at $2.172 billion, with no significant debt maturities before 2026. Overall, these factors suggest that XRAY's dividend is safe for the time being.

Still Bullish

XRAY: Weekly Chart (Source: Author's TradingView Account)

XRAY recently approached a logical resistance level around $39. In my previous article, I mentioned that $39 would be a strong inflection point to monitor. However, as you can see from the chart above, price went into a deeper correction and consolidated around the $26 level. Today, the XRAY chart has more structure than when I first covered it. Since the lows of November last year, prices have rallied by over 50%. Currently, XRAY is attempting to break its multi-month resistance (neck line), as shown in the chart. If this happens, it will attract more bulls, which could push its price higher. Upon investigating its simple moving averages ("SMA"), we now have more bullish confluence than the last time. However, it is important to note that the price still trades below its 200-day SMA, which implies that we are still in bearish territory. In case of a pullback, I believe that $34 and $31 support levels are worth monitoring.

Attractive on its 2026 Target

As mentioned earlier, 2023 will be a year of transition for Dentsply Sirona as it implements its organizational restructuring plan. The plan aims to promote operating efficiency, with a long-term goal of achieving $3.0 adjusted earnings per share ("EPS") in 2025/2026. The management's ambitious EPS target makes XRAY's valuation attractive, with a forward P/E of 13.06x, which is better than its 5-year average of 18.87x.

Additionally, assuming a conservative growth in top-line revenue amounting to $4.21B in FY25 (compared to my previous analysis) and a positive turnaround on its EBITDA margin to 21% (higher than its 3-year average of 19.4%), we can arrive at a forward EV/EBITDA of 9.86x. When compared to its 5-year average of 16.07x, XRAY is still attractive as of this writing.

Conclusive Thoughts

Another value-adding catalyst for XRAY is that it has initiated a $150 million dollar accelerated share repurchase program. This move is expected to contribute to the achievement of its long-term goal of increasing EPS, demonstrating management's commitment to aligning the company towards sustainable profitability and enhancing shareholder value.

To sum it up, despite today's headwinds, XRAY has an improving portfolio in its US operations, operating efficiency catalysts, and a liquid balance sheet that can support its growing dividend, making the stock attractive ahead of its long-term target.

Thank you for reading and good luck!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in XRAY over 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.