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Why Is Henry Schein (HSIC) Down 34.7% Since Last Earnings Report?

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It has been about a month since the last earnings report for Henry Schein (HSIC - Free Report) . Shares have lost about 34.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Henry Schein due for a breakout? 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 Q4 Earnings and Revenues Top Estimates

Henry Schein, Inc. reported adjusted earnings per share  from continuing operations of 97 cents in the fourth quarter of 2019, up 8.9% year over year. Adjusted earnings  beat the Zacks Consensus Estimate by 6.6% on revenue growth across each of its operating segments.

On a reported basis, earnings from continuing operations was $2.25, showing a stupendous increase of 192.2% on a year-over-year basis primarily due to a net gain on the sale of equity investments.

For 2019, adjusted earnings was $3.51, up 10.7% from the year-ago period. The bottom line  beat the Zacks Consensus Estimate by 1.7%.

Revenues in Detail

Henry Schein reported net sales of $2.67 billion in the fourth quarter, up 8.1% year over year. The metric beat the Zacks Consensus Estimate by 1.1%. The year-over-year improvement came on the back of 5.8% internal sales growth in local currencies along with acquisition growth of 3.1%. Unfavorable foreign currency exchange made a 1% impact on the top line.

Excluding product sales to Covetrus under the transition services agreement related to Henry Schein’s Animal Health spin-off, normalized internal sales growth in local currencies was 4.9%.

For 2019, revenues totaled $9.98 billion, up 6.1% from the year-ago period. The top line beat the Zacks Consensus Estimate by 0.3%.

In the quarter under review, the company recorded sales of $1.95 billion in the North American market, up 8.2% year over year. Sales totaled $721.1 million in the international market, up 7.2% year over year.

Segment Analysis    

Henry Schein derives revenues from four operating segments — Dental, Medical, and Technology and Value-added Services.

In the fourth quarter, the company derived $1.72 billion of global Dental sales, up 2.9% year over year. This includes 4.2% growth in local currencies and 1.3% adverse impact of foreign currency exchange. At local currencies, internally-generated sales grew 2.5% and acquisition growth was 1.7%.

Worldwide Medical revenues climbed 15.2% year over year to $788.7 million.  Internally-generated sales grew 10.2% and acquisition growth was 5%. The company did not face any impact from foreign currency exchange.

Revenues from global Technology and Value-added Services grew 20% to $137.1 million. This included 20.3% growth in local currencies and a 0.3% drop, owing to adverse currency translation.At local currencies, internally-generated sales grew 9.4% and acquisition growth was 10.9%, led by the contribution from Lighthouse 360.

Margin Trend

Gross profit increased 7.9% to $810.6 million in the reported quarter. Gross margin, however, remained flat year over year at 30.4%. Adjusted operating income improved 1.4% year over year to $194.7 million. However, adjusted operating margin contracted 47 bps to 7.3%.

Financial Position

The company exited 2019 with cash and cash equivalents of $106.1 million compared with $56.9 million at the end of 2018. Cumulative cash flow from continuing operations at the end of 2019 was $820.5 million compared with $450.9 million in the year-ago period.

During the quarter under review, Henry Schein repurchased 8.2 million shares of its common stock for approximately $525 million. At the end of the year, it had $275 million authorized for the repurchase of common stock.

2020 Guidance

The company has reaffirmed its adjusted earnings guidance for 2020. It expects adjusted earnings of $3.65 to $3.75, suggesting 4-7% growth from that reported in 2019. The guidance assumes no significant supply-chain disruption related to the Novel Coronavirus Disease 2019 (COVID-19) for certain infection control products. The Zacks Consensus Estimate for 2020 adjusted earnings is pegged at $3.71.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Henry Schein has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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 has been net zero. 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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