Morningstar | Henry Schein's Animal Health Spin-Off Grants Flexibility to the Company's Balance Sheet
From our perspective, Henry Schein's position as a major supplier to dental practices has deteriorated over the last few years, as competition within the dental consumable segment has increased significantly. What has ensued for Schein has been inconsistent growth and pressured profits. From what we can gather, the increased competition has emanated from new online-based wholesale players that can source consumables from the cheapest suppliers nationwide. We believe this pressure will last over a material amount of time as established online wholesalers will continue to take share, and we have seen evidence that new entrants are poised to move into this market niche. Nevertheless, Schein's unmatched scale and expertise within the dental capital equipment market and practice management software product supports material customer switching costs and a narrow economic moat. While we believe the competitive environment has tightened for Schein, it still possesses a solid distribution network it can leverage into a key driver of economic profits. However, in order to maintain the relevance of this distribution network, the firm has implemented a major restructuring of its sales and wholesaling operations. This strategy includes migrating away from a legacy model that required dedicated sales staff to each of its dental customers and toward a more automated service offering. From our perspective, this is the correct course and should help Schein work through its current issues. Buoying Schein's operations is its dental capital equipment sales and maintenance business. Displacing the firm will be a tough task within this niche given its distribution and installation expertise of these products. In addition, dental customers are reliant upon Schein for many of their capital equipment maintenance needs--creating material switching costs. Augmenting the switching costs is the firm's practice management software product as it further locks customers into its grasp. We believe this dynamic will offset some of the issues the firm is facing within its consumable operations. The confluence of these factors lead to a narrow moat rating for Schein.Schein (Henry) provides health care products and services to office-based dental and medical practitioners. The health care distribution segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. The company's technology group offerings include practice management software systems for dental and medical practitioners. The company's practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, and continuing education services for practitioners.
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