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Henry Schein Inc. (HSIC - Analyst Report) reported adjusted EPS of $1.23 in the second quarter of 2013, up 10.8% year over year. The result beat the Zacks Consensus Estimate by a penny.

Quarter in Detail

Henry Schein reported revenues of $2.39 billion in the second quarter, up 8.6% year over year. In addition, the quarterly revenues were marginally ahead of the Zacks Consensus Estimate of $2.38 billion. The surge in revenues was led by 8.7% growth in local currencies with a 4.0% and 4.7% rise in internal sales and acquisition, respectively. Unfavorable foreign exchange hampered growth by 0.1%.

Henry Schein derives revenues from dental, medical, animal health and technology and value-added services. In the second quarter, the company derived $1.3 billion in revenues from global dental sales, up 6.2% year over year. This includes local currency growth of 6.0% comprising acquisition growth of 3.0%, combined with internal sales rise of 3.0%. It was supported by growth of 0.2% related to foreign exchange tailwinds. The franchise witnessed 4.1% growth in North America while international sales improved 9.7% for the dental segment.

Worldwide medical sales shot up 7.4% year over year to $387.9 million based on acquisition growth of 1.2% coupled with internal sales growth of 6.2%, reflecting 9.5% growth in local currencies in the quarter. Foreign exchange movement had no impact on segment results. Henry Schein recorded a hike of 7.5% for its medical franchise in North America whereas, overseas business revenues increased 6.5%.

The company’s global animal health segment witnessed 13.7% growth in revenues to $666.3 million, including 14.1% surge in local currencies with internal sales growth of 4.2% along with acquisition growth of 9.9% and a negative impact of 0.4% related to foreign currency exchange. The franchise revenues rose 9.6% in North America while overseas revenues for the animal health segment recorded 17.8% growth.

Revenues from technology and value-added services climbed 14.5% to $78.0 million. This included 14.9% growth in local currencies with acquisition growth of 5.3% and internal sales growth of 9.6%, offset by a 0.4% dip from foreign exchange headwinds. While revenues in North America shot up 14.2%, international revenue growth for the segment was 16.2% in the quarter.

Gross margin in the second quarter was 28.0%, down 35 basis points (bps) year over year. This was primarily due to unfavorable product mix as sales of lower-margin animal health products accelerated along with the acquisition of low margin businesses. Operating margin was 7.4%, up 20 bps from the prior-year quarter.

Exiting the second quarter, Henry Schein had cash and cash equivalents of $78.8 million, down from $122.1 million at the end of 2012. Net cash provided by operating activities was $274.8 million compared with $178.5 million a year ago. During the reported quarter, the company repurchased 840,000 shares for $78.1 million and was left with $149 million of authorization for future repurchases.

Outlook Tweaked

Henry Schein narrowed its guidance for 2013. The company envisages adjusted EPS in the range of $4.86−$4.91, representing growth of 9%−11% year over year, compared with prior guidance of $4.81−$4.91. The current Zacks Consensus Estimate of $4.88 lies within the guided range.

Our Take

Henry Schein reported solid growth in the second quarter of 2013 to beat the Zacks Consensus Estimates. We are encouraged by the company’s consistent growth via organic and inorganic means. We are upbeat about the positive business momentum of the dental business. Henry Schein is well positioned to gain from its extensive global foothold and diverse channel mix. Favorable market dynamics is a major growth catalyst going forward. We believe that high-growth avenues like the animal health market should improve Henry Schein’s growth profile.

However, these positive factors are partly tempered by the current economic scenario that has bolstered the bargaining power of GPOs. The austerity measures across Europe continue to adversely affect the healthcare industry. A tough competitive landscape and currency headwinds also weigh on the stock.

Currently, the stock carries a Zacks Rank #3 (Hold). However, other stocks such as Patterson Companies Inc. (PDCO - Analyst Report), The Cooper Companies Inc. (COO - Analyst Report) and Align Technology Inc. (ALGN - Analyst Report) are worth considering. These stocks carry a Zacks Rank #2 (Buy).

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