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Henry Schein (HSIC) Up 3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Henry Schein (HSIC - Free Report) . Shares have added about 3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Henry Schein due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Henry Schein Rides on Overall Segmental Growth in Q3

Henry Schein 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.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Henry Schein has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Henry Schein has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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