The digital revolution is fast transforming the healthcare scenario across the globe.
The medical dental supplies industry with segments such as dental implants, dental prosthetics and dental equipment is rapidly catching up as well. This requires industry players to ramp up investments in research and development.
According to a December 2016 research article published by Health Affairs, a large part of the population in the United States is grappling with financial factors when it comes to receiving dental care. They also analyzed data from a 2014 National Health Interview Survey and concluded that compared to other types of health care services, people of any age, income level and type of insurance struggle with maximum financial hurdles in case of dental care.
Moreover, the practicing dentists witnessing reimbursement rate cuts is a concern. Per a Morgan Stanley report (published in May 2018), the reimbursement rate is expected to decline 3.3% over the next year compared with a decline of 2.9% in the past year. Going by the report, dental spending growth has been observed to start moderating.
Meanwhile, the long-term prospects of the industry seem lucrative. This is because poor eating habits like extreme tobacco, sugar and alcohol intake raises the risk of chronic dental diseases (according to a Global Market Insights report). Further, increasing incidence of conditions like periodontitis, gingivitis, infections and oral thrush are expected to drive the medical dental supplies industry over the long haul.
Industry Comparison with S&P 500 & Sector
Zacks Medical – Dental Supplies industry, within the broader Zacks Medical Sector, has underperformed the S&P 500 and its own sector in the past year.
While stocks in this industry have collectively gained 15.4%, the Zacks S&P 500 Composite and Zacks Medical Sector have rallied 17.8% and 31.4%, respectively.
The underperformance can be attributed to escalating operational expenses, intensifying competition, high treatment cost and challenges associated with the ongoing digital revolution.
Also, ease of entrance of dental suppliers, abundance of substitutes, monopoly of suppliers, strict consumer sovereignty and intra-industry rivalry have been impeding the industry’s growth for quite some time now.
One-Year Price Performance
Zacks Medical – Dental Supplies Stocks Trading Cheap
The industry’s valuation is quite cheap right now, thanks to the underperformance over the past year.
Valuation is a tricky business for Medical Dental Supplies companies. Not to forget, these companies spend a lot on unplanned R&D and hence it is difficult to account for such high expenses. Notably, one might gain a fair idea of the industry’s relative valuation from its Price/Book ratio.
The industry currently has a Price/Book TTM ratio of 3.15, which is a little away from the high end of 3.38 over the past year.
The space also looks quite discounted when compared to the market at large as the Price/Book TTM ratio for the S&P 500 is 4.08 and the median level is 3.82.
Price-to-Book Trailing Twelve Months (TTM)
Dim Earnings Outlook Keeps Us Cautious
Further, persistent weakness in the global economy may impede dental technology sales and lead to postponed investments in capital equipment by dentists. Although we expect a gradual pickup in patient traffic, any hiccup in the recovery process will aggravate the problems.
Furthermore, the near-term growth prospects of the Medical - Dental Supplies industry are being called into question owing to the growing use of refurbished equipment. Some of the analysts are of the opinion that this may impede growth of the niche market.
One reliable metric that can give investors an idea of the industry’s future price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, showing the earnings revision trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line shows the same for 2018.
Price and Consensus: Medical - Dental Supplies industry
Please note that the $5.63 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Medical - Dental Supplies industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018 but how this estimate has been moving recently.
This becomes clear by focusing on the aggregate EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Current Fiscal Year EPS Estimate Revisions
As you can see, the $5.63 EPS estimate for the Zacks Medical - Dental Supplies industry implies a decent year-over-year improvement.
However, it has declined 3.3% since February 2018-end. Looking at the earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings potential. This could possibly be due to the challenges associated with the continuous technological advancements within the Medical-Dental Supplies industry.
Zacks Industry Rank Indicates Bleak Near-Term Prospects
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term.
The Zacks categorized Medical - Dental Supplies industry currently carries a Zacks Industry Rank #218, which places it in the bottom 15% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Our proprietary Heat Map shows that the industry’s rank was in the bottom 15% for the past three weeks.
Medical Dental Supplies Industry Promises Long-Term Growth
The long-term prospects for the industry indicate steady growth. When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Medical – Dental Supplies industry of 9.9% appears promising. The corresponding figure for the Zacks S&P 500 composite is 9.8%.
The group’s mean estimate of long-term EPS growth rate has been declining from the high of 10.9% achieved in January 2018, and the current estimates are the lowest over the past year.
Mean Estimate of Long-Term EPS Growth Rate In fact, the basis of this long-term EPS growth could be a steady increase in the top line that the Medical Dental Supplies industry has seen since the end of 2016. Bottom Line
Although the short-term picture looks dull, the industry is beaming with prospects for investors who are ready to wait it out.
Per a MarketsandMarkets report, children and teenagers are expected to dominate the global orthodontic market in the coming years. A high number of patients with malocclusions and jaw disorders are likely to drive demand. Also, rising need for fixed braces among children and teenagers will act as a major demand propeller. Notably, orthodontic treatment is more effective and successful in childhood or teenage years.
Growing aesthetic needs are expected to be a major growth catalyst for the dental prosthetic market. Per MarketsandMarkets, the global cosmetic dentistry is expected to make $22,362.4 million by 2020, at a CAGR of 6.8% during 2015-2020. Moreover, an increase in disposable income gives rise to higher demand for cosmetic dental surgeries.
An aging population has been a significant contributor. Higher incidence of calcium deficiency in older people leads to teeth loss. According to the National Institute of Dental and Craniofacial research, more than 24% of adults aged above 74 years have lost all teeth. People on medication for chronic and metabolic disorders also reach an edentulous state.
Poor lifestyle choices and unhygienic dental care also lead to higher demand for dental procedures. Increased dental diseases are another factor. Also, dental injuries caused by road accidents lead to higher demand for dental implants and prosthetics.
Thus, keeping the long-term expectations in mind, investors could advantage from the cheap valuation and bet on a few Medical - Dental Supplies stocks that have a strong earnings outlook.
Here we pick stocks from the Medical - Dental Supplies industry with a Zacks Rank #3 (Hold) which have seen positive earnings estimate revision. You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here . Align Technology, Inc. ALGN: This company manufactures and markets a system of clear aligner therapy, intra-oral scanners and CAD/CAM (computer-aided design and computer-aided manufacturing) digital services used in dentistry, orthodontics, and dental records storage.
Meanwhile, the company’s recent earnings estimate revisions have been promising. For the current year, nine estimates have gone up in the past 60 days with no movement in the opposite direction. This had a positive impact on the Zacks Consensus Estimate, which increased 0.4% in the past two months. The stock has gained 51.4% over the past year.
Price and Consensus: ALGN Henry Schein, Inc. HSIC: In a major breakthrough within its dental business, in May 2018, Henry Schein entered the rapidly growing market for orthodontic aligners with its proprietary SLX Clear Aligner System. Management seems to be encouraged with the positive feedback for the product from the Key Opinion Leaders and other market participants. Henry Schein plans to increase the availability of the same in the United States in the remaining half of 2018, followed by a global launch in 2019.
Estimate revisions for the current year have been solid with 10 estimates upwards, with no downward movement over the past two months. The stock has gained 16.5% in the past six months.
Price and Consensus: HSIC Straumann Holding AG SAUHF: It is a global leader in implant and restorative dentistry and oral tissue regeneration has gained 26.2% over the past year.
In collaboration with leading clinics, research institutes and universities, Straumann researches, develops and manufactures dental implants, instruments, prosthetics and tissue regeneration products for use in tooth replacement and restoration solutions or to prevent tooth loss.
Price and Consensus: SAUHF Merit Medical Systems, Inc. ( MMSI Quick Quote MMSI - Free Report) : Headquartered in South Jordan, UT, Merit Medical Systems produces single-use medical products of high quality. This Zacks Rank #3 stock has gained 43.7% over the past year. Price and Consensus: MMSI Will You Make a Fortune on the Shift to Electric Cars?
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