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HSIC Misses Earnings Despite Y/Y Gain

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Henry Schein Inc. (HSIC) reported adjusted earnings per share (EPS) of $1.06 in the first quarter of 2013, missing the Zacks Consensus Estimate by a penny, despite 8.2% year over year growth. The result also underlines the first earnings miss for the company after five straight quarters of positive earnings surprise.

As reported earlier, Henry Schein refinanced the debt of roughly $220 million associated with Butler Schein Animal Health transaction in a bid to reduce its interest expense. As expected, the refinancing closed by the end of the first quarter of 2013. After including the 3 cents associated with Henry Schein’ s refinancing initiatives, reported EPS was $1.03 compared with 89 cents in the year-ago quarter.

Quarter in Detail

Henry Schein reported revenues of $2.29 billion in the quarter, up 9.3% year over year. Also, the quarterly revenues were marginally ahead of the Zacks Consensus Estimate of $2.25 billion. The surge in revenues was led by 9.2% growth in local currencies with a 3.3% and 5.9% rise in internal sales and acquisition, respectively. Unfavorable foreign currency exchange muted the local currency growth by 0.1%.

Henry Schein derives revenues from dental, medical, animal health and technology and value-added services. In the reported quarter, the company derived $1.2 billion in revenues from global dental sales, up 3% year over year. This includes growth of 2.9% from local currencies due to acquisition growth of 3.2% offset by internal sales decline of 0.3% and growth of 0.1% related to foreign exchange tailwinds. The franchise witnessed 1.9% growth in North America while international sales improved 4.7% for the dental segment.

Worldwide medical sales shot up 9.6% year over year to $388.9 million reflecting 9.5% growth in local currencies based on acquisition growth of 1.2% coupled with internal sales growth of 8.3% and rise of 0.1% due to favorable foreign exchange. Henry Schein recorded hike of 10.4% for its medical franchise in North America whereas, overseas business revenues decreased 2.5%.

The company’s global animal health segment witnessed 21.6% growth in revenues to $639.1 million in the quarter, including 21.7% surge in local currencies with internal sales growth of 6.8% along with acquisition growth of 14.9% and a negative impact of 0.1% related to foreign currency exchange. The franchise revenues rose 14.9% in North America while overseas revenues for the animal health segment recorded 28.5% growth.

Revenues from technology and value-added services climbed 18.7% to $74.7 million. This included 18.9% growth in local currencies with acquisition growth of 7.2% and internal sales growth of 11.7% offset by a 0.2% dip from foreign exchange headwinds. While revenues in North America shot up 17.3%, international revenue growth for the segment was 27.9% in the quarter.

Gross margin in the quarter was 28.2%, down 88 basis points (bps) year over year. This was primarily due to unfavorable product mix as sales of lower-margin animal health products accelerated along with acquisition of low margin business. Adjusted operating margin (excluding restructuring costs in the quarter) was 6.7%, down 22 bps from the year-ago quarter.

Exiting first quarter of 2013, Henry Schein had cash and cash equivalents of $90.6 million, down from $122.1 million at the end of 2012. During the reported quarter, the company repurchased 840,000 shares for $73.5 million and was left with $227 million of authorization for future repurchases. Despite the considerable share repurchase activity, its impact on the bottom-line was insignificant.

Outlook Maintained

Henry Schein reiterated guidance for 2013. The company envisages adjusted EPS in the range of $4.81−$4.91, representing growth of 8%−11% year over year. The current Zacks Consensus Estimate of $4.87 lies within the guided range.

Our Take

Henry Schein reported healthy year over year growth in the first quarter. However, the earnings miss was a downside. Margin pressure in the quarter was another headwind. Nonetheless, we are encouraged to note the solid segment growth, especially for the animal health franchise. Given that the animal health market is the company’s fastest growing market, we expect accelerated growth going forward.

Notably, the European economy remains an overhang for Henry Schein. The industry is plagued by pricing pressure and competitive tussle for market share gains. We still believe that the company’s diversified business offers resilience against macroeconomic volatility and a tough competitive landscape.

The stock carries a Zacks Rank #3 (Hold). While we have a neutral stance on Henry Schein, we believe that other stocks such as Becton, Dickinson and Company (BDX), The Cooper Companies (COO) and West Pharmaceutical Services Inc. (WST) are worth considering. These stocks carry a Zacks Rank #2 (Buy).

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