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Henry Schein's (HSIC) Q3 Earnings Top, Revenues Lag Estimates

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Henry Schein, Inc. (HSIC - Free Report) reported adjusted earnings per share (EPS) of $1.03 in the third quarter of 2018, up 18.4% year over year. Adjusted EPS beat the Zacks Consensus Estimate of $1.01 by 2%, driven by revenue growth across all business segments.

On a reported basis, EPS came in at 79 cents in the third quarter, down 9.2% year over year.

Revenues in Detail

Henry Schein reported net sales of $3.28 billion in the third quarter, up 3.8% year over year. However, the metric missed the Zacks Consensus Estimate by 2.1%.  The year-over-year improvement came on the back of 3.2% internal sales growth in local currencies along with acquisition growth of 1.9% in the quarter. The top line edged down 1.3% owing to unfavorable foreign currency exchange.

In the quarter under review, the company recorded sales of $2.24 billion in the North American market, up 5.7% year over year. Sales totaled $1.04 billion in the international market, down 0.3% year over year.

Segment Analysis    

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

Henry Schein, Inc. Price, Consensus and EPS Surprise

In the third quarter, the company derived $1.51 billion in revenues from global Dental sales, up 2.4% year over year. This includes 4.4% growth in local currencies and 2% adverse impact from foreign currency exchange. At local currencies, internally-generated sales increased 3.5% and acquisition growth was 0.9%. Internal growth at local currencies included 4.7% improvement in North America and 1.6% growth internationally.

The company's global Animal Health segment witnessed a 1.9% rise in revenues to $899.3 million. This includes 3.4% growth in local currencies and 1.5% adverse impact from foreign currency exchange. At local currencies, internally-generated sales inched up 1.1% and acquisition growth was 2.3%. The internal growth in local currencies included 0.4% rise in North America and 1.8% improvement internationally.

Worldwide Medical revenues climbed 4.5% year over year to $721.9 million. Growth in local currencies was 4.5%.

Revenues from global Technology and Value-added Services grew 32% to $143.9 million. This included 32.6% growth in local currencies and 0.6% decrease from adverse currency movements. Acquisitions contributed 24.8% in the quarter under review.

Margin Trend         

Gross profit increased 6.3% to $888.6 million in the reported quarter. However, gross margin expanded 60 basis points (bps) from the year-ago quarter to 27.1% despite a 2.6% escalation in cost of sales.  

Despite a 7.3% rise in selling, general & administrative expenses of $668 million, adjusted operating income improved 3.3% year over year to $220.6 million. Nonetheless, adjusted operating margin shrunk 10 bps year over year to 6.7% in the Sep-end quarter.

Financial Position

Henry Schein exited the third quarter of 2018 with cash and cash equivalents of $119.7 million compared with $111.3 million at the end of second-quarter 2018. For the first nine months of 2018, net operating cash flow was $390.8 million compared with $307.5 million in the year-ago period.

During the quarter under review, Henry Schein repurchased 777,000 shares of its common stock for approximately $61 million. At the close of the third quarter, the company had $86 million authorized for repurchase of common stock.

2018 Guidance Reiterated

The company has reiterated its 2018 EPS guidance. It continues to expect EPS in the range of $4.06-$4.14, reflecting 13-15% growth from the 2017 adjusted EPS figure of $3.60. The Zacks Consensus Estimate for 2018 adjusted EPS of $4.12 is within the guided range.

Our Take

Henry Schein exited the third quarter of 2018 on a mixed note. All of the company's operating segments recorded year-over-year growth. Henry Schein's strong share gains in the North American markets raise optimism. Year-over-year improvement in gross margin also encourages us.

Nonetheless, we are disappointed with the year-over-year deterioration in operating margin due to higher expenses.

Meanwhile, we are looking forward to Henry Schein recently entering into a new exclusive distribution agreement with Sprig Oral Health Technologies Inc. Per the agreement, Henry Schein will distribute Sprig's products to help its customers place crowns.

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 spin-off, accordingly, is expected to bring major changes to Henry Schein’s overall operating results.

According to the company, following the spin-off, the Animal Health business will merge with privately-held Vets First Choice to form a new public entity 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), currently.

A few better-ranked stocks in the broader medical space, which reported solid earnings this season, are Intuitive Surgical (ISRG - Free Report) , Stryker Corporation (SYK - Free Report) and Merit Medical Systems, Inc. (MMSI - Free Report) . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical reported third-quarter 2018 adjusted EPS of $2.83, which beat the Zacks Consensus Estimate of $2.65. Revenues totaled $920.9 million, also surpassing the consensus estimate of $918.6 million.

Stryker posted third-quarter 2018 adjusted EPS of $1.69, outpacing the Zacks Consensus Estimate of $1.68. Operating margin was 17.8%, up 30 bps.

Merit Medical reported third-quarter 2018 adjusted EPS of 47 cents, which trumped the Zacks Consensus Estimate of 42 cents. Revenues of $221.6 million edged past the consensus estimate of $218 million.

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