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Henry Schein (HSIC) Grows Through Acquisitions, Runs Risks

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On Sep 22, we issued an updated research report on Melville, NY-based Henry Schein, Inc. (HSIC - Free Report) , a leading distributor of health care products and services across the globe.

We are disappointed by Henry Schein’s guidance cut for 2016 EPS. Also, foreign currency fluctuations and competitive headwinds continue to hurt the company.

We note that, Henry Schein’s business continues to suffer from the emergence of group purchasing organizations (GPOs) and the consequent pricing pressure they are exerting on single healthcare providers like Henry Schein.

Moreover, Henry Schein operates in the highly competitive U.S. healthcare products and service distribution industry, wherein the presence of other large players puts the company in a tight spot. Fluctuating currency rates and macroeconomic weaknesses are other threats to the company.

On the positive side, Henry Schein has been focused on making strategic acquisitions as part of its expansion plans. The company has been on an acquisition spree over the last couple of years. In this regard, the latest development is the company’s decision to buy an 80% ownership position in Marrodent, one of Poland's largest full-service dental distributors.

This deal will fortify Henry Schein’s position in Poland by foraying into the region’s emerging dental market. Additionally, with this deal, Henry Schein will be able to strengthen its operations in various sectors across 27 countries.

Earlier this year, the company acquired an 80.1% interest in Vetstreet, a leading provider of marketing solutions and health information analytics. Another important acquisition has been a 90% ownership stake in Dental Trey, an Italy-based distributor of dental consumable merchandise and equipment.

Henry Schein also stands to gain from several trends in its end-markets, such as 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.

Currently, Henry Schein has a Zacks Rank #4 (Sell). Better-ranked stocks in the broader medical sector are Align Technology Inc. (ALGN - Free Report) , Merit Medical Systems, Inc. (MMSI - Free Report) and Derma Sciences Inc. , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Align Technology has gained 42.9% year to date, much better than the S&P 500’s 5.9% over the same period. Over the past two months, the company has seen 9 estimates move higher, compared to no downward movement.

Merit Medical Systems has an impressive long-term earnings growth rate of 12.5%. Year to date, the stock has performed better than the S&P 500, with a gain of 28.9%.

Derma Sciences’ current-year earnings growth rate is 94.5%, way higher than the industry’s 7.4%. The stock recorded a gain of 7.9% year to date.

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