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Henry Schein's (HSIC) Q2 Earnings Beat, '18 EPS View Up

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Henry Schein, Inc. (HSIC - Free Report) reported adjusted earnings per share (EPS) of $1.04 in the second quarter of 2018, up 18.2% year over year. Adjusted EPS beat the Zacks Consensus Estimate of $1.02 driven by strong revenue growth across all business segments.

On a reported basis, EPS was 92 cents in the second quarter, reflecting a 7% improvement year over year.

Revenues in Detail

Henry Schein reported net sales of $3.33 billion in the second quarter, up 8.7% year over year and surpassing the Zacks Consensus Estimate by 0.7%. . The year-over-year improvement came on the back of 4.8% internal sales growth in local currencies and 2.2% increase owing to foreign currency exchange. Acquisition growth was 1.7% in the quarter.

In the second quarter, the company recorded sales of $2.17 billion in the North American market, up 6.8% year over year. Sales totaled $1.16 billion in the international market, up 12.5% year over year.

Segment Analysis    

Henry Schein derives revenues from four operating segments: Dental, Medical, Animal Health and Technology and Value-added services.

In the second quarter, the company derived $1.61 billion in revenues from global Dental sales, up 8.4% year over year. This includes 5.9% growth in local currencies and 2.5% contribution from foreign currency exchange. At local currencies, internally-generated sales increased 4.4% and acquisition growth was 1.5%. Internal growth at local currencies included 5.1% improvement in North America and 3.4% rise internationally.

The company's global Animal Health segment witnessed a 10.6% rise in revenues to $985.9 million. This includes 7.4% growth in local currencies and 3.2% increase from foreign currency exchange. At local currencies, internally-generated sales increased 4.4% and acquisition growth was 3%. The internal growth in local currencies included 3.2% rise in North America and 5.8% improvement internationally.

Henry Schein, Inc. Price, Consensus and EPS Surprise

 

Worldwide Medical revenues rose 7.5% year over year to $614 million. Growth in local currencies was 7.2%, with 0.3% coming from favorable foreign exchange.

Revenues from global Technology and Value-added Services grew 4.9% to $113.8 million. This included 3.7% growth in local currencies and 1.2% rise related to foreign currency exchange. Acquisitions contributed 0.7% in the quarter under review.

Margin Trend         

Gross profit increased 7.4% to $901.1 million in the reported quarter. However, gross margin contracted 30 basis points (bps) from the year-ago quarter to 27.1% due to a 9.5% rise in cost of sales.  

Despite a 7.7% rise in selling, general & administrative expenses of $677.2 million, adjusted operating income improved 6.3% year over year to $223.9 million. However, adjusted operating margin declined 20 bps year over year to 6.7% in the reported quarter.

Financial Position

Henry Schein exited the second quarter of 2018 with cash and cash equivalents of $111.3 million, compared with $99.2 million at the end of first-quarter 2018. For the first six months of 2018, net operating cash flow was $216.9 million, compared with $176.1 million in the year-ago period.

During the quarter under review, Henry Schein repurchased 744,000 shares of its common stock for approximately $53 million. At the close of the second quarter, the company had $147 million authorized for repurchase of common stock.

2018 Guidance

Excluding costs related to restructuring and the spin-off and merger of Henry Schein’s global Animal Health business, the company has revised its 2018 EPS guidance. The company now expects EPS in the range of $4.06-$4.14, in comparison to the previously announced range of $4.03-$4.14, reflecting 13-15% growth from the 2017 adjusted EPS figure of $3.60. The Zacks Consensus Estimate for 2018 adjusted EPS of $4.10 is within the guided range.

Our Take

Henry Schein exited the second quarter of 2018 on a strong note. All of the company's operating segments recorded strong year-over-year growth. Henry Schein's strong share gains in the North American and overseas markets along with solid revenues raise optimism.

Despite the better-than-expected revenue performance, we are disappointed with the year-over-year deterioration in gross and operating margin due to higher cost of sales and expenses.

We currently await the completion of the company’s global Animal Health business' planned spin-off. This business contributes nearly 30% to the company’s top line. The spinoff, accordingly, is expected to bring major changes to Henry Schein’s overall operating results.

According to the company, 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. We believe, this initiative is part of Henry Schein's 2018-2020 Strategic Plan to focus more on dental and medical businesses.

Zacks Rank & Key Picks

Henry Schein carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical sector which reported solid results this earnings season are Intuitive Surgical (ISRG - Free Report) , Chemed Corporation (CHE - Free Report) and Align Technology, Inc. (ALGN - Free Report) . While Intuitive Surgical sports a Zacks Rank #1 (Strong Buy), Chemed and Align Technology carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical reported second-quarter 2018 adjusted EPS of $2.76, which beat the Zacks Consensus Estimate of $2.48. Revenues totaled $909.3 million, also surpassing the consensus estimate of $870 million.

Align Technology posted second-quarter 2018 adjusted EPS of $1.30, steering past the Zacks Consensus Estimate of $1.09. Revenues came in at $490.3 million, beating the consensus estimate of $462.9 million.

Chemed reported second-quarter 2018 adjusted EPS of $2.81, which trumped the Zacks Consensus Estimate of $2.68. Revenues of $441.8 million edged past the Zacks Consensus Estimate of $432.3 million.

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