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Morningstar | Henry Schein Reports in Line Fiscal Fourth Quarter Alongside a Relatively Weak 2019 Outlook

Henry Schein's fiscal fourth-quarter results mostly met our expectations, while the company's fiscal 2019 guidance is below our forecast. Management's fiscal 2019 adjusted EPS range of $3.38-$3.46 falls below our prediction of $3.68. We are reiterating our narrow-moat rating, but we may reduce our fair value estimate after we incorporate management's lower-than-anticipated 2019 outlook. We are not surprised by management labeling 2019 as a transitional year, as the company continues to work through its remaining spin-off activities. Additionally, management highlighted that the guidance assumes dental trends do not improve for the company. In our view, this puts a spotlight on Henry Schein's ongoing challenges from discount products and pricing pressure.

We think long-term headwinds in the dental industry will persist due to product commodification and low-cost competition. Global dental sales fell by 0.2% compared with the same period last year, driven by a 7% decline in global CAD/CAM sales and soft consumable markets in North America. Margin compression relative to the year-ago period persisted, as gross margin decreased 20 basis points to 27% and operating margin (excluding restructuring and spin-off transaction costs) decreased 30 basis points to 7%. Headwinds from discount vendors are unlikely to abate soon, and we also remain concerned about the increasing concentration of corporate dentistry buyers and its affect on long-term pricing power. We think Henry Schein has few options for meaningful margin recovery with the possible expansion of bolstering its private label specialty business. The company hinted at potential specialty M&A opportunities in emerging market regions, which we think could be a prudent use of its roughly $1.1 billion of newly infused cash from the recent spin-off of its animal health segment.