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Can Dental Growth Drive Henry Schein's (HSIC) Q2 Earnings?

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Henry Schein, Inc. (HSIC - Free Report) is expected to report second-quarter 2018 results on Aug 6. Last reported quarter, the company’s earnings exceeded the Zacks Consensus Estimate by 3 cents. Overall, the metric surpassed estimates in two of the last four quarters, the average positive surprise being 0.27%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Over the last few quarters, Henry Schein demonstrated solid growth across all four segments, namely Dental, Animal Health, Medical and Technology plus Value-Added Services. Geographically, the company gained traction in North America and overseas. We expect this trend to continue in the impending quarterly results as well.

Favorable Dental Business Trend: The company’s strategy to expand digital dentistry globally is encouraging. In this regard, management believes that the company is well-positioned to benefit from the ongoing trend of digitalization in the international dental market.

Henry Schein, Inc. Price and EPS Surprise

Henry Schein, Inc. Price and EPS Surprise | Henry Schein, Inc. Quote

Particularly, the market is looking forward to Henry Schein’s latest joint venture with Internet Brands on dental technology to form Henry Schein One. Transaction of the same is supposed to get completed during the second quarter itself. The company is hopeful about this alliance, which will deliver integrated dental technology to help improve practice management, marketing as well as patient communication.Although, this quarter to be reported might not have gained any significant boost from this consolidation, the near-term outlook is promising.

Furthermore, we are upbeat about management’s expectations about the sustained dental equipment business growth in Europe and other regions.

Henry Schein is busy promoting digital workflows for general dentistry as well as dental specialties. Starting Sep 1, 2017, the company started selling the full range of DENTSPLY SIRONA’s (XRAY) dental equipment across North America including the leading CEREC CAD/CAM restoration system. This is expected to drive the top line to a considerable extent. Also, per management, this agreement is expected to prove accretive to earnings per share from 2018 onward. Thus, we are looking forward to the deal’s contribution to Henry Schein’s bottom line in the to-be-reported quarter.

Additionally, Henry Schein continues to distribute products from Planmeca, 3Shape and 3M as well as the dental equipment and consumer product lines of its longstanding partner Danaher under the KaVo Kerr brands.

We also note that the end market has been relatively stable now for almost a couple of years with no material deterioration.

Animal Health Spin-Off Update: Henry Schein’s decision to spin off the company’s major segment global Animal Health business came as a surprise to investors. This business used to contribute nearly 30% to the company’s topline. Not only that, last reported quarter, this business generated 13.1% rise in revenues to $919.8 million. Undoubtedly, the spin off, is expected to bring in major changes to Henry Schein’s overall operating results.

Following the spinoff, the Animal Health business will merge with privately-held Vets First Choice to form a new public company called Vets First Corp. Henry Schein is highly optimistic about the contract and believes that the combined entity will create new global leadership in the growing animal health market. Per the company, this transaction will assimilate the power of data analytics, digital communications, practice management software and supply chain expertise to a multi-channel platform. The spin-off is expected to be closed by the end of 2018.

Meanwhile, for the second quarter, we are optimistic about the well-diversified Animal Health product portfolio featuring software, diagnostic equipment and surgical instruments. The product offerings have been driving growth domestically as well as overseas.

Notably, during the fourth quarter of 2017, Henry Schein acquired Merritt Veterinary Supplies and integrated it into its Animal Health business. We are also keeping a close watch on the the deal’s contribution to Henry Schein’s financials this reporting season.

Growing Medical Business: Henry Schein is consistently working on boosting its Medical segment. Notably, worldwide, Medical revenues rose 6.9% year over year in the first quarter. We expect to see another quarter of strong organic growth from existing wide customer base. Organic growth should also be benefited from higher patient traffic.

Broad Distribution Network: We are also bullish about the company’s pervasive distribution network. Apart from North America and Europe, the company has presence in Australia and New Zealand as well as in the emerging nations of China, Brazil, Israel, Czech Republic and Poland. We are firmly convinced that Henry Schein will continue to ride on the strength of its broad distribution network in the quarter under review.

On the flip side, Henry Schein’s disappointing gross and operating margin performance over the last few quarters due to higher cost of sales and expenses is a headwind.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Henry Schein this quarter to be reported. This is because a stock needs to have both a positive Earnings ESP  and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Henry Schein has an Earnings ESP of -0.25%.

Zacks Rank: Henry Schein carries a Zacks Rank #3, which increases the predictive power of ESP. However, a negative ESP lowers the odds of an earnings surprise. Therefore, this combination leaves surprise prediction inconclusive.

Nonetheless, the Zacks Consensus Estimate of $1.02 for second-quarter 2018 adjusted earnings reflects a rise of 15.9% year over year. The consensus mark for second-quarter total revenues of $3.30 billion represents a 7.9% increase from the year-ago period.

Stocks Worth a Look

Here are a few stocks worth considering with the right combination of elements to beat estimates this time around.

National Vision Holdings, Inc. (EYE - Free Report) has an Earnings ESP of +1.88% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank Stocks Here.

Ardelyx, Inc. (ARDX - Free Report) has an Earnings ESP of +6.17% and a Zacks Rank of 2.

Natera, Inc. (NTRA - Free Report) has an Earnings ESP of +21.15% and is a Zacks #2 Ranked player.

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