Henry Schein (NASDAQ:HSIC) is a large seller of dental supplies and equipment. With a market cap of over $8 billion, the business is a major player in the dental market.
Given that the US dental market is expected to grow at an annualized rate of almost 8 percent through the rest of the decade, investors hoping to take advantage of the growth of this essential part of the medical industry may be tempted to look at Henry Schein as a pick-and-shovel play.
Does Henry Schein have a wide enough moat to fend off other medical supply businesses, and does the stock look like a good investment today?
Henry Schein’s Market Share
Within the broader category of medical equipment and supplies, Henry Schein’s market share is a modest 2%. That comparison to the larger market, however, masks the business’s rather strong position in the niche category of dental supplies because HSIC is one of the largest suppliers worldwide of dental supplies to office-based practitioners, making it an integral part of the dental medicine ecosystem.
To get a sense of where Henry Schein stands in the market, we can compare its presence in the overall medical equipment and supplies market to that of another major business in the dental niche, Dentsply Sirona.
As of Q2, Dentsply Sirona accounted for just 0.6% of the overall market, only a bit over a quarter of Henry Schein’s market presence. With both businesses being specialists in dental equipment and supplies, this provides some context of just what a major force Henry Schein is within the dental marketplace.
How Protected Is Henry Schein From Competition?
Needless to say, market share on its own doesn’t produce a wide moat. In addition to existing market share, a business must have a robust economic advantage that will allow it to keep or expand that share. In Henry Schein’s case, that advantage appears to come in part from a focus on dental and medical consumables.
With so many offices already using Henry Schein’s products and many offices in the habit of simply reordering from their existing suppliers, Henry Schein enjoys a steady pipeline of renewable sales. By virtue of being one of the largest players in its space, Henry Schein also benefits from efficiencies of scale that potential competitors could struggle to match.
It’s also worth noting that Henry Schein provides essentially a one-stop shop for dental offices, a factor that is also likely to keep it at the top of its market. Henry Schein sells everything from simple gloves and dental instruments to anesthetics and diamond drill burs. This fact keeps Henry Schein as a convenient option for the many dental and medical offices that are already using its products.
Furthermore, Henry Schein has been working on a strategic plan management refers to as BOLD+1. This initiative involves investment in high-growth business areas and strategic restructuring with the goal of lifting margins.
While net margins remain fairly low, gross margins have been trending upward since 2020, reflecting the success of this and other strategic initiatives. BOLD+1 also seeks to position Henry Schein as a leader in dental technology, potentially expanding its high-margin business lines and helping it to stay out in front of the competition.
What About Future Growth?
Between the BOLD+1 plan and ongoing attempts to improve cost efficiency, Henry Schein appears to be setting itself up for both immediate and long-term growth. Q2’s earnings report detailed a 3.3 percent increase in net sales, though GAAP EPS fell a bit from $0.80 in the year-ago quarter to $0.70.
This, however, is expected to be a temporary state of affairs, because analysts have forecasted annualized earnings growth of ballpark 7% range over the coming 3-5 years.
This estimate is roughly in line with the results Henry Schein hopes to achieve through BOLD+1 and its other growth initiatives. As the results from these programs begin to appear in the business’s financial performance, management expects to see earnings growth in the high single-digit to low double-digit range. For this year, EPS growth is expected to be positive, though at the lower range of 1-4 percent compared to 2024’s numbers.
Henry Schein also has opportunities beyond the US market through its global distribution business. In Q2, for instance, sales from global distribution and value-added services rose 2.9 percent, including a 7.4 percent increase in global technology sales. With demand for dental services still rising worldwide, it’s likely that Henry Schein could have good long-term growth opportunities on the international front.
Is HSIC a Good Stock to Buy at the Moment?
In addition to its competitive moat, performance and growth potential, it’s also important to consider Henry Schein’s valuation when looking at it as a potential investment.
Right now, HSIC is likely trading at a fair, value, though it probably isn’t actively undervalued. Shares of Henry Schein are priced at 22.1 times earnings, 0.7 times sales and 25.6 times operating cash flow. While the ratio to cash flow is somewhat high, the stock’s metrics overall suggest a more or less fair valuation.
The view that HSIC is trading at a fair price also seems to hold among analysts. The consensus price target for the stock is $73.23, which is 7.1 percent above the most recent price of $68.39. Though this leaves some room for upside, it doesn’t seem that most analysts expect HSIC to surge anytime soon. The consensus rating for the stock is a hold, as recommended by 9 of the 12 analysts covering HSIC.
On the whole, Henry Schein appears to be a fairly priced business with a fairly wide moat and reasonable chances for future growth. While HSIC may not produce surging returns in the near future, the stock could be worth looking at for conservative investors seeking gradual returns as the business’s margins widen and its earnings grow. Shareholders willing to buy and hold HSIC are also likely to benefit from Henry Schein’s ongoing share buyback program, which currently has over $450 million in remaining repurchase authorization.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.