Dentsply Sirona (XRAY, Financial) is the largest manufacturer of dental equipment in the world. Management is expecting high growth for 2017. The stock is a major holding of the Sequoia Fund.
The company has 230.2 million shares, the stock trades for $65.26, and the market cap is $15 billion. Diluted earnings per share are $1.94, and the stock trades at a price-earnings (P/E) ratio of 33.6. The dividend is 35 cents, and the dividend yield is 0.5%. Not a cheap stock.
The best thing about Dentsply is its free cash flow. Cash flow from operations is usually around $500 million per year and capital expenditures $100 million for the last few years. Last year operating cash flows were $563.4 million, and capital expenditures were $125 million for a free cash flow of $438.4 million for a free cash flow yield of 2.9%. Still not a cheap stock by any means. Last year the company bought back 814 million shares with that free cash.
Operating margins were 12.4%. Earnings guidance for 2017 is $2.80 to $2.90. On $2.90, the stock would trade at a P/E of 22.5. And now we see why Sequoia owns shares! The company was formed from a merger of Dentsply and Sirona in 2015.
The balance sheet shows $384 million in cash and $636 million in receivables. The liability side shows $750 million in payables and $1.532 billion in debt. Very solvent.
Dentsply is on the cutting edge of dentistry and is basically soup to nuts in teeth. The company makes everything from the chair you sit in at the dentist’s office to the X-ray machine. The company also makes prosthetics and implants.
Standard & Poor's is very bullish on the stock. Its analyst, K. Snyder, has a target of $70 per share. Snyder see EPS of $2.28 in 2017 and $3.26 in 2018. Snyder’s guess for EBITDA margins this year are between 25.4% and 26.2%. Very impressive.
According to the Sequoia Fund, “We’ve owned predecessor company Sirona since 2011, and it has been an excellent performer. Our original investment thesis was based on Sirona’s leadership in digital dentistry. Sirona is strong in digital equipment, and its product line includes CEREC, an incredibly innovative and useful CAD/CAM system that allows dentists to design and mill crowns in their offices during the course of a single patient visit. The merger brings together the highest-tech maker of dental equipment (Sirona) with the largest maker of dental consumables (Dentsply), creating the industry’s largest global supplier. It is our belief that Dentsply Sirona is in a unique position to create and sell new value-added solutions in both equipment and consumables over the years ahead.”
According to the Annual Report, combined, both companies would have grown revenues from $2.928 billion in 2012 to $3.745 billion last year. That’s some growth! The company earns 35% of its revenues in the U.S., 39% in Europe and 26% in the rest of the world.
A report on the dental equipment industry expects that $8.45 billion will be spent in the U.S. in 2022. Its reasons for growth include: an increasing global geriatric population, rising demand for dental tourism, and the beginning of technological development in the field of dentistry.
If Dentsply can deliver on what management thinks it will grow, the stock is a buy. Now doubt that it’s a tech company in health care. At a forward P/E of 22.5, the stock is reasonably priced.
Disclosure: We do not own shares.
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