Thursday, April 13, 2006

Painless Dentistry-What's Left In Dental Equipment?

Yesterday, Danaher (DHR) announced that it was acquiring Sybron Dental (SYD) for $47 cash.

Danaher truly is a world class enterprise with a brilliant culture and a systematic approach to building value. What had been a bit of a hodgepodge of domestic cyclical businesses has developed into an innovator and a global enterprise. Unfortunately, at current prices (EV/EBIT of 16.5 times) I find DHR somewhat expensive.

What I would like to think about however, is the dental supply industry and what is left of it in public companies.

Danaher has been a very effective consolidator of the dental equipment industry with its subsidiaries of Gendex, which is involved in dental radiography and panoramic X-rays; Pelton and Crane, dental chairs and lighting systems; and KaVo, precision instruments.

Sybron, at its take-out price, is selling at about 16.5 times EV/EBIT and has generated a ROIC of 12.1% on a TTM basis. Earnings growth over the last five years has been about 9%.

The remaining non-bulletin board participants in this industry are:

Biolase Technology (BLTI) which manufactures and markets laser-based products for medicine and dentistry as well as bio-materials. Though possessing interesting technology, the business is currently negative CFFO and negative EBIT.

Dentsply (XRAY) is the largest supplier of dental products with a global reach. About 3 times the size of Sybron, XRAY sells at a whopping 65 times EV/EBIT due to about $233 million in last year’s pre-tax impairment and restructuring charges. Normalized, results look more like 15.7 times EBIT. Normalized ROIC would come in at a 18%.About 80 % of CFFO is free cash flow and FCF margins on a TTM basis are about 11%.

Young Innovations (YDNT)
has been named to the Forbes 200 best small companies in America list for the last five years.. The business is focused on preventative dentistry with its specialization in prophy and angle products, the basic tools used in dental cleaning. Sales of disposable prophy angles are the biggest source of revenue to YDNT. International sales are less than 10%. The company also markets panoramic X-ray machines and hand pieces (drills.) The company has shown a ROIC of 14.8% last year. Earnings growth over the last five years has been an impressive 14.5%. The company is selling at 12.5 times EV/EBIT. About 75% of CFFO is free cash flow with FCF margins in the TTM of about 16%.With only about 9 million shares outstanding, and insider ownership that is just over 40%, this is a very thin trading stock.

Patterson Dental (PDCO)
and Henry Schein (HSIC) are primarily distribution companies rather than manufacturing businesses with PDCO deriving about 75% of its revenues from the dental segment and HSIC deriving some 40% from this area.
I will be doing some further work in the medical distribution area for a later post, so please stay tuned.

As you can see, the dental equipment industry has a fairly short list of pure players. The economics are quite attractive as these returns on invested capital demonstrate. Smart buyers like Danaher appear to have a growing appetite for this industry.

Disclaimer: Neither I nor my family have a current position in DHR, BLTI, XRAY, YDNT, PDCO, SYD or HSIC. A number of clients do currently have a position in YDNT.


At 11:23 PM, Blogger Dan O'Leary said...

Don't forget 3M Dental

At 11:51 PM, Anonymous Anonymous said...

Love the idea of a value play but with negative or single digit growth prospects with the exception of DHR and HSIC and a gross profit margin under 60% its hard not to take a look at Synergetics (SURG)which has 84.60% Growth (yoy) and 62.59% Gross Margin, it is expensive at 44 times earnings but compared to xray's 100 times earnings. Although it is a different field then dental.
Disclosure i do not own any mentioned stocks and do not know any one who does. Although i am condsidering SURG.

Sacramento CA

At 4:45 PM, Blogger Rick said...

In looking at MMM, the healthcare division represents about 20% of revenues but includes products that run the gamut from healthcare information systems to surgical drapes and stethoscopes. The dental segment does provide bio-materials and sealants, crowns and orthodontic appliances.The business does have a good reputation with dentists that I have contacted, but of course, tends to be obscured by the rest of the healthcare biz as well as the 80% of the business that is not healthcare related.The healthcare biz, including an underperforming and "strategically being reviewed" pharmaceutical biz, operates at a 27% operating margin. Good suggestion...thank you!

At 5:45 PM, Blogger Rick said...

As to SURG, my comment is that earnings growth and cash flow growth are quite different here. The company on a TTM basis had negative cash flow from operations of -$1.75 million. Unlike the dental equipment companies that I have discussed here, SURG does not generate free cash flow. Its return on invested capital has improved considerably from historic levels of about 2% to a TTM ROIC of 11.7%, but still below that of the dental equipment companies. I have not looked into their technology. Good luck with this!


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