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We reiterate our Neutral recommendation on DENTSPLY International Inc. (XRAY - Analyst Report). Its second quarter 2012 adjusted earnings per share of 62 cents beat the Zacks Consensus Estimate of 56 cents per share.
Revenues increased 25.2% year over year to $763.0 million, surpassing the Zacks Consensus Estimate of $747 million. Growth was backed by acquisitions and strong internal sales in the U.S. as well as in the overseas market. Reported profit grew 8.8% year over year to $80.8 million (or 56 cents a share) in the quarter led by the Astra Tech acquisition as well as operating margin expansion.
Pennsylvania-based DENTSPLY International’s overall growth strategy rests on product innovation. Despite challenging macroeconomic headwinds, the company posted solid internal growth on the back of innovative new products and persistent strength in the performance of its dental specialties and lab business.
DENTSPLY acquired Astra Tech, the dental implant division of multinational drug major AstraZeneca PLC (AZN - Analyst Report), in 2011 . The acquisition of Astra Tech has reinforced the company’s leadership in the global dental market and broadened its product range.
Currently, the company is investing in the combined digital solution platform, which includes the Atlantis customized deposit platform. It believes that this will be a very powerful growth driver for the combined business. The company opened two combined dental implant organizations in North America and Iberia and also proposed to launch more such organizations in different countries in the near term.
The company has also started rolling out its orthodontics products line in the second quarter, following the Japanese supply outage, and is already ahead of plan to replenish its international distributors with its products. However, the impact of the outage is expected to continue to drag on the bottom line.
Further, DENTSPLY has a strong international presence. The company’s products are used in over 120 countries. This enables DENTSPLY to leverage the changing dental practice in North America and Western Europe, which emphasizes preventive care and cosmetic dentistry. Emerging markets (such as Asia-Pacific, Middle East/Africa and Latin America) offer healthy growth opportunities on a long-term basis as they remain vastly untapped with low penetration.
However, the significant currency fluctuation in international markets has compelled the company to reduce its guidance. A strengthening U.S. dollar especially against the Euro has led DENTSPLY to lower its 2012 earnings guidance from $2.22—$2.30 to $2.18—$2.24 per share.
In addition, although DENTSPLY’s domestic U.S. market, of late, has shown signs of recovery, demand for dental products is slow mainly due to the troubled U.S. labor market, currency fluctuation and the overall economic uncertainty in the region. Austerity measures in southern Europe due to geopolitical uncertainties also remain a headwind.
Moreover, after the Astra Tech acquisition, DENTSPLY’s long-term debt has increased considerably. In the last reported quarter, long-term debt more than doubled from the year ago period to $1,482.8 million. The company needs to focus on strengthening its cash balance so that it can make strategic investments for future growth.
DENTSPLY operates in highly competitive markets and hence we remain cautious about the aggressive competition from players like Sirona Dental Systems (SIRO - Snapshot Report). We currently have a Neutral recommendation on DENTSPLY, which carries a short-term Zacks #3 Rank (Hold).