Dentsply Sirona (NASDAQ:XRAY) is a large manufacturer of dental equipment and supplies that came into existence as the result of a 2016 merger between Dentsply and Sirona Dental Systems.
Shares of the stock have sold off by 43.6 percent in the last 12 months, a drop that has left them looking cheap by historical standards, so is XRAY stock undervalued at the moment, or is the stock’s price likely to remain depressed?`
XRAY’s Present Valuation
Shares of XRAY are trading at fairly modest multiples of 0.8 times sales and 1.5 times book value. The stock’s price-to-operating-cash-flow ratio, however, is relatively high at 20.7. This high price multiple to cash flow may well raise concerns for investors, especially in light of the fact that Dentsply Sirona hasn’t been able to deliver positive net income on a GAAP basis in any given 12-month period since mid-2022.
Although XRAY has delivered sharp losses to its shareholders over the last year, analysts generally believe that the stock could have some upside in it at the moment. With XRAY shares currently priced at $14.30, the average analyst target price of $17.14 would see the stock rise by about 17.9 percent.
Revenues Sliding Is Starting To Really Hurt
Dentsply Sirona has been experiencing a poor run of negative net income for multiple years. This trend of net losses has coincided with a period of declining revenues. For the full year of 2021, management reported revenues of $4.23 billion. Over the last 12 reported months, that number has fallen to just $3.67 billion.
The business’s negative trends persisted in Q2, with Dentsply Sirona reporting net sales of $936 million, down 4.9 percent from the year-ago quarter. Gross profit fell 4.0 percent to $490 million, though it’s worth noting that the business did manage to achieve a slight increase in its gross margin to 52.4 percent from 51.9 percent.
Even with this expansion of gross margin, though, Q2 saw Dentsply Sirona’s EPS fell from ($0.02) in the year-ago quarter to ($0.22). The adjusted EPS was positive at $0.52, up from $0.49 a year ago.
Even so, operating cash flow fell to $48 million from $208 million last year. Though the year-ago quarter’s cash flows reflected a substantial foreign tax refund, the reduction in operating cash flow remains fairly concerning. In addition to the sharp reduction in operating cash flow, free cash flow fell from $156 million to just $16 million.
Similarly worrying is the fact that Dentsply Sirona’s US net sales dropped by 18.3% last quarter. This disproportionately negative result in the US market was paired with an 18.1 percent reduction in revenue from orthodontic and implant solutions.
The latter result was particularly worrisome, as the dental implant market is a reasonably fast-growing one that is expected to keep expanding at a CAGR of about 8.0 percent through 2030. XRAY’s failure to take advantage of this growth could have it leaving a potentially lucrative revenue stream on the table.
For the full year, management expects net sales to fall by between 2.0 and 4.0% compared to 2024. Though adjusted EPS is expected to fall in the range of $1.80 to $2.00 per share, there may not be a particularly strong chance of the business returning to GAAP profitability in the immediate future.
Can Dentsply Sirona Get Back on Track?
In light of the problems the business is facing, it’s important to note that management has committed to increasing its customer focus and actively making investments with a mind to improving cash flow.
Though potentially steps in the right direction, such initiatives could take a while to show up in future earnings reports and may be counteracted by a challenging macroeconomic environment.
One development that could rapidly benefit Dentsply Sirona is a normalization of American trade policy. Management now estimates an annual cost of $80 million from tariffs, up from a previous estimate of $50 million.
Recently, an appellate court ruled against the Trump administration’s reciprocal tariffs. As with many other businesses, though, Dentsply Sirona will have to wait for the Supreme Court to rule on this case to see whether and how changes to the current tariff scheme resulting from legal challenges will affect its business.
XRAY’s Dividend Is High, But Possibly Difficult to Sustain
Another factor to consider about Dentsply Sirona is its high dividend, which currently stands at nearly 4.5 percent. This is by far the highest yield range in XRAY’s history, and for most of that time the yield has been under 1 percent.
Though high yields of this sort can be tempting, it’s worth keeping in mind that they also tend to signify elevated risks.
This is particularly true with a business like Dentsply Sirona that hasn’t been able to achieve and maintain consistent net profitability and which is facing substantial pressure on its free cash flows.
Is XRAY Stock Undervalued?
Even after a selloff that has wiped out over 40% of its value, XRAY still seems to have some fundamental problems that may very well prevent it from being a good value buy. Chief among these, of course, are the slow deterioration of its revenues and the long streak of losses the business is experiencing.
With the US market showing particular signs of softness, Dentsply Sirona will likely have to demonstrate real growth progress to get investors back on board.
This view also seems to hold among institutional investors, who have sold nearly twice what they’ve bought in XRAY shares over the last six months. The gap between institutional selling and buying is still quite large, indicating that institutional investors may still not be viewing the stock’s depressed prices as attractive enough to jump on.
While there’s little doubt that XRAY looks cheap based on some of its pricing multiples and its unusually high dividend yield, the selloff the stock has experienced appears to reflect fundamental weaknesses within the business that likely justify a lower price.
As such, the stock may not be a particularly good value buy at the moment. It’s worth noting, however, that XRAY may very well see a significant price bump if and when a court ruling substantially changes America’s tariff policies.
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.