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Shares of Henry Schien Inc. (HSIC - Analyst Report) lost 3.3% since it announced a lower-than-expected third-quarter 2013 result.

The company reported adjusted earnings per share (EPS) of $1.22 in the third quarter of 2013, up 12.9% year over year. However, the results missed the Zacks Consensus Estimate of $1.40.

Quarter in Detail

Henry Schein reported revenues of $2.34 billion in the third quarter, increasing 5.3% year over year. Nevertheless, the top line fell below the Zacks Consensus Estimate of $2.36 billion. The surge in revenues was led by 5.2% growth in local currencies with 3.4% and 1.8% rise in internal sales and acquisitions, respectively. Favorable foreign exchange accounted for a nominal 0.1% growth.

Segments in Detail

Henry Schein derives revenues from four operating segments, viz Dental, Medical, Animal Health and Technology and Value-added services.

In the third quarter, the company derived $1.18 billion in revenues from global Dental sales, up 5.7% year over year. Segment revenues include local currency growth of 5.2% which comprises acquisition growth of 2.2%, combined with internal sales rise of 3.0%. Revenue performance was also supported by growth of 0.5% related to foreign exchange tailwinds. The franchise witnessed an improvement of 4.4% in North America while international sales increased 8.1%.

Worldwide Medical sales increased 0.5% year over year to $444.5 million based on internal sales growth of 0.3%. Acquisitions had no impact. Foreign exchange movement aided a rise of 0.2% in segment results. Overseas business revenues declined, while in North America, the franchise, generated majority of the sales.

The company’s global Animal Health segment witnessed 7.4% improvement in revenues to $642.2 million. This was owing to 8% surge in local currencies with internal sales rise of 5.9%, along with acquisition growth of 2.1% and an impact of 0.6% from foreign exchange tailwinds. The franchise revenues rose 10.4% in North America while overseas revenues scaled up 4.8%.

Revenues from global Technology and Value-added Services climbed 11.2% to $78.9 million. This included 11.8% rise in local currencies with acquisition growth of 3.3% and internal sales growth of 8.5%. At the same time, the positives were offset by a 0.6% dip from foreign exchange headwinds. While the segment revenues in North America shot up 10.9%, international revenues grew 13% in the quarter. The segment registered healthy growth on account of rise in electronic services, reoccurring revenues and, software sales.

Margin trends

Gross profit increased 4.9% to $0.63 million in the third quarter of 2013. However, the gross margin came in at 27.0%, remaining flat with the year ago quarter.

The operating margin expanded 13 basis points year over year to 6.8%. This was primarily driven by a 4.35% rise in selling general & administrative expenses to reach $0.47 million. According to the company, a reduction in operating margin was partially neutralized by a lower gross margin due to product mix.

 Financial Update

Exiting the third quarter, Henry Schein had cash and cash equivalents of $69.91 million, down from $122.1 million at the end of 2012. Operating cash flow was $152.8 million, up 94.6% year over year.

During the reported quarter, the company bought back 730,000 shares for $75 million and was left with $74 million of authorization for future repurchases.

Guidance

Henry Schein reiterated its guidance for 2013. The company envisages adjusted EPS in the range of $4.86−$4.91, representing growth of 9% to 11% year over year, compared with the prior guidance of $4.81−$4.91. The current Zacks Consensus Estimate of $4.89 lies within the guided range.
 
The company provided its guidance for 2014 as well. It expects adjusted EPS to be in the range of $5.37-$5.47, representing growth of 10% to 12%.The Zacks Consensus Estimate for 2014 is pegged at $5.42 per share, which also lies at the midpoint of the guided range.

Our Take

Although Henry Schein missed the Zacks Consensus Estimate on both top and bottom lines, the year-over-year growth at both fronts is indicative of the company’s consistent growth via organic and inorganic means. We are encouraged to find that in spite of the austerity measures in Europe, HSIC continues to garner market share in the Dental segment. Moreover, the recent strategic acquisition announced on Oct 29, 2013 to enter South Africa, along with plans to expand global footprint is expected to act as a growth catalyst. Strong sales are also expected from E4D NEVO scanner in the Dental business as dentists have responded positively to the product.

However, these positive factors face the threat of the current economic scenario that can pose difficulties for Henry Schein in the near term. The austerity measures across Europe continue to adversely affect the healthcare industry. A tough competitive landscape and currency headwinds are also likely to weigh heavily on the company’s operational and stock performance.

Currently the stock carries a Zacks Rank #3 (Hold). Other stocks that are worth a look include Align Technology Inc. (ALGN - Analyst Report) and McKesson Corporation (MCK) each carrying a Zacks Rank #1 (Strong Buy) as well as Cardinal Health, Inc. (CAH - Analyst Report) carrying a Zacks Rank #2 (Buy).

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