We retain our Neutral recommendation on leading dental products maker DENTSPLY International (XRAY) following our assessment of its second-quarter fiscal 2011 results. Adjusted earnings of 55 cents a share for the quarter topped the Zacks Consensus Estimate of 51 cents. Profit was boosted by internal growth and foreign exchange tailwind.
Revenues (up 7.8%) also beat the Zacks Consensus Estimate driven by organic growth, favorable foreign exchange translation and acquisitions. However, sales in Japan were hit by supply disruption (for orthodontic products) due to the March 2011 quake. The company beefed up its earnings guidance for fiscal 2011 based on a stable-to-improving market conditions.
DENTSPLY’s diversified product portfolio serves as a natural hedge against any significant sales shortfall in a volatile economy. The company’s overall growth strategy rests on product innovation. DENTSPLY is poised to grow its share in the dental implant market, driven by a strong product base and significant investment on product/technology innovation and sales/marketing infrastructure.
DENTSPLY has a strong international presence, enabling it to leverage the changing dental practice across North America and Western Europe. Emerging markets (such as Asia-Pacific and Latin America) offer a healthy growth opportunity on a long-term basis as they remain vastly untapped with low dental penetration.
Moving forward, DENTSPLY should benefit from the gradual recovery in the global dental market. Not being a life-sustaining product, the dental market was badly affected by the economic downturn that resulted in patients deferring their adoption.
The company’s acquisitions and strategic collaborations will also support growth. Its recent move to buy AstraZeneca’s (AZN) dental implant unit Astra Tech for $1.8 billion represents a healthy prospect. The deal will unite two of the fastest growing dental implant businesses, creating the third-largest player in this market.
Besides reinforcing its leadership in the global dental market and broadening its product range, the acquisition (expected to close by end-2011) will unlock opportunities for DENTSPLY to tap new markets for growth. The company expects the acquisition to increase its revenues by 25% and to be accretive to adjusted earnings in the first year following the closure of the deal.
However, DENTSPLY’s domestic operations still remain challenged due to a slow economic recovery and competitive pressure. We also account for the unfavorable impact of the supply chain outage in Japan on the company’s bottom line. Although DENTSPLY has taken appropriate actions in response to such disruption, the company envisions the negative impact to double or even exceed in the remaining quarters of 2011. Our recommendation is backed by a short-term Zacks #3 Rank (Hold).
