Morningstar | Straumann's 2Q Performance Tracks Our Expectations Amid Double-Digit Organic Growth
Narrow-moat Straumann's second-quarter performance provided no major surprises to us. The company's slight increase in 2018 revenue expectations to midteens percentage growth (up from low-teens) still encompasses our 16% forecast, but we may revisit our long-term growth assumptions given the company's recent momentum, which may lead to a slight increase to our fair value estimate. The upgraded outlook comes amid another quarter of double-digit organic revenue growth across all regions compared with last year, with strong performance across its premium and non-premium implant segments.While we still anticipate high growth for Straumann in the near term, we think broad category commodification will somewhat constrain long-term profits. The company's gross margin during the first half of 2018 fell 60 basis points lower than the year-ago period because of a negative offset from digital equipment. We anticipate continued gross margin pressure to stem from increased reliance on cheaper, lower-complexity products across the nonpremium dental categories. Excluding one-time inventory revaluation expenses, the company's underlying EBIT margin increased 50 basis points to roughly 26% compared with the year-ago period, but we agree with the company's expectation for relatively muted margin expansion. While we think Straumann's nimble approach to M&A and capital allocation is broadly value-accretive, we anticipate effects from capacity investment and amortization of acquisition-related intangibles will constrain EBIT margin expansion.
We expect Straumann's clear aligner business will benefit the company. The segment experienced 52% case growth during the first half of 2018 compared with the year-ago period. We expect this growth to continue, as the company works toward a full market release in Europe, Latin America, and Asia in 2019. Additionally, we think the company will find a clear aligner partner in China to speed up the regulatory process in the region.
Straumann is engaged in tooth replacement solutions that include dental implants, prosthetics and regenerative products. Co. develops, manufactures and supplies dental implants, instruments, computer-aided design/computer-aided manufacturing prosthetics and tissue regeneration products for use in tooth replacement and restoration solutions or to prevent tooth loss. Co. provides a range of services to dental practitioners, clinics and laboratories. Through a collaboration with its academic partner the International Team for Implantology ( ITI), Co. supports research and offers training and education to dental professionals worldwide.
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