Tactical Restructuring And Global Expansion Propel Future Growth And Margin Potential

Key Takeaways

• Strategic focus on high-growth, high-margin products could significantly boost income and earnings as these areas scale.
  
• Global expansion and tech-driven e-commerce advancements position the firm for increased revenue and market share.
  
• Ongoing recovery and restructuring, along with decreased demand and higher costs, may pressure revenue growth and margins despite potential strategic savings.

Catalysts

Provides health care products and services to dental practitioners, laboratories, physician practices, and ambulatory surgery centers, government, institutional health care clinics, and other alternate care clinics worldwide.

• The successful implementation of the BOLD+1 strategic plan has led to growth and efficiency, suggesting potential for increased future revenue and higher net margins as the company continues to execute its strategy and expand high-margin product lines.
  
• The focus on high-growth, high-margin products and services, which are expected to generate over 40% of operating income for fiscal 2024, indicates potential for improved operating income and earnings growth as these businesses scale further.
  
• Continued global expansion with launches like BioHorizons' Tapered Pro Conical implant and strategic restructuring in dental specialties, such as transitioning to the Smilers clear aligner brand, could drive future revenue growth and market share gains.
  
• Launching the global e-commerce platform in the U.K. and Ireland, and plans to expand it to the United States, suggest potential for increased revenue by enhancing customer interaction and sales channels through advanced technology.
  
• The restructuring plan targeting $75 million to $100 million in annual run rate savings by the end of 2025 should help improve operating margins and earnings as efficiencies are realized and reinvested into growth initiatives.

Henry Schein Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Henry Schein's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $762.8 million (and earnings per share of $4.76) by about November 2027, up from $314.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.7x on those 2027 earnings, down from 29.7x today. This future PE is lower than the current PE for the US Healthcare industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 8.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.93%, as per the Simply Wall St company report.

Henry Schein Future Earnings Per Share Growth

Risks

• Ongoing recovery from a prior cyber incident is still impacting distribution business sales, which could depress revenue if recovery is slower than expected.
  
• Restructuring initiatives, especially in the orthodontic business, might lead to temporary disruptions or decreased revenue during the transition period.
  
• Decreased demand for respiratory diagnostic products and flu and COVID vaccines is impacting the medical segment, potentially lowering revenue and earnings.
  
• Price sensitivity among customers is leading to a shift towards lower-cost and owned-brand dental products, which could impact overall revenue growth even if margins remain stable.
  
• Higher depreciation costs from strategic investments and a higher effective tax rate next year could pressure net margins and earnings growth despite restructuring savings.

Valuation

• The analysts have a consensus price target of $74.82 for Henry Schein based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $83.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.7 billion, earnings will come to $762.8 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 5.9%.
• Given the current share price of $74.84, the analyst's price target of $74.82 is 0.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.