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Henry Schein (HSIC) Poised on Solid Growth, Risks Remain

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On Mar 27, we issued an updated research report on Melville, NY-based Henry Schein, Inc. (HSIC - Free Report) . It is a leading distributor of health care products and services across the globe. The company currently carries a Zacks Rank #3 (Hold).

Over the past three months, Henry Schein traded above the Zacks categorized Medical - Dental Supplies industry. The stock returned 12.47%, higher than 8.14% gain of the broader industry. The company exited fourth-quarter 2016 on a solid note and we expect this trend to continue in the upcoming quarter. Also Henry Schein’s continued strong share gains in both the North American and overseas markets along with solid operating performance raise further optimism on the stock.

We are also encouraged by Henry Schein’s growing distribution business which boasts a wide global footprint with 61 distribution centers. Apart from North America and Europe, it has presence in Australia and New Zealand as well as in emerging nations like China, Brazil, Israel, Czech Republic and Poland being the latest one. Recently, the company completed its majority buyout of Poland-based Dental Cremer. The company’s decision to acquire 80% ownership of a Poland-based dental distributor Marrodent will also help it fortify its position in the emerging dental markets.

Also, Henry Schein might gain from several trends in its end markets, one of them being customer demographics. According to a recent estimation, between 2015 and 2025, the population aged 45 and older will likely grow approximately 12%. This demographic trend is expected to boost the utilization of dental and medical products distributed by the company.

However, a comparative study of Henry Schein’s forward P/E (F12M basis) multiple reflects that the stock is quite overvalued. The multiple currently stands at 23.06, stretched when compared to its own range (median of 22.75). Even when compared to the broader industry, the comparison is unfavorable as the current P/E (F12M basis) for the industry is 17.3 for the last three months. We believe the company’s recent developments including several acquisitions and tie-ups will keep the valuation stretched for some time.

Escalating costs and expenses continue to be a drag on the company’s margins and put pressure on the bottom line. A tough competitive landscape and pricing pressure also weigh on Henry Schein’s stock.

This apart, the recent emergence of group purchasing organizations (GPOs) and the consequent pricing pressure that they are exerting on single healthcare providers, like Henry Schein, might hamper the company’s business efficacy.

Key Picks

Better-ranked stocks in the broader medical sector include Inogen Inc. (INGN - Free Report) , Avinger, Inc. (AVGR - Free Report) and Fluidigm Corporation . Inogen sports a Zacks Rank #1 (Strong Buy) while Fluidigm and Avinger carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen has a long-term expected earnings growth rate of 17.50%. Notably, the stock has an impressive one-year return of 89.4%.

Avinger projects sales growth of 30.63% for the current year. Additionally, the company has a projected earnings per share growth rate of 39.53% for the current year.

Fluidigm has a long-term expected earnings growth rate of 25%. The stock posted a positive earnings surprise of 1.6% in the last reported quarter.

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