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On Dec 13, we maintained our long-term Neutral recommendation on Henry Schein Inc. (HSIC - Analyst Report) following its third-quarter 2013 results. This leading global distributor of health care products and services carries a Zacks Rank #3 (Hold).

Why Still Neutral?

Henry Schein reported disappointing third-quarter 2013 results with both the top and bottom line missing the Zacks Consensus Estimate. The company reported adjusted earnings per share (EPS) of $1.22 in the third quarter, up 12.9% year over year but below the Zacks Consensus Estimate of $1.40. Revenues increased 5.3% year over year to $2.34 billion, but failed to meet the Zacks Consensus Estimate of $2.36 billion.

The year-over-year growth at both the fronts is indicative of the company’s consistent growth via organic and inorganic means. The company continues to gain from its broad footprint in the fast growing animal health market. Growth in its core dental business also bolsters confidence. Henry Schein is well positioned to further gain from its extensive global foothold and diverse channel mix. It also stands to gain from attractive market dynamics and favorable demographic trends.

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 to enter South Africa, along with plans to expand global footprint, is expected to act as a growth catalyst for the company.

We are upbeat on future growth prospects, owing to Henry Schein’s efficient use of cash to make tuck-in acquisitions. New offerings and the company’s strategic buyouts should foster growth. Meanwhile, attractive returns to shareholders through share repurchase activities help to boost investors' confidence.

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

Given the current growth trend, the company has 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.

Stocks that Warrant a Look

While we remain on the sidelines for Henry Schein, we are positive on McKesson Corporation (MCK - Analyst Report), Align Technology Inc. (ALGN - Analyst Report) and Cardinal Health, Inc. (CAH - Analyst Report) doing well. These stocks carry a Zacks Rank #1 (Strong Buy).

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