March 18, 2015 DENTSPLY International Inc. Current Recommendation Prior Recommendation NEUTRAL Outperform Date of Last Change 02/19/2012 Current Price (03/17/15) $51.13 Target Price $54.00 SUMMARY (XRAY-NASDAQ) DENTSPLY s fourth-quarter results failed to impress with EPS of $0.60 missing the Zacks Consensus Estimate by $0.01. Revenues of $719 million declined 4.6% and also missed the consensus mark. Strengthening of the U.S. dollar against Euro, weakness in Japan, Brazil and CIS region, intensifying competition and higher capital expenditure on product development are some of the headwinds in the near term. DENTSPLY continues to focus on improving cost structure that will help it to achieve 20% operating margin in the long run. However, persistent decline in sales will ultimately put margins under significant pressure going forward. Nevertheless, we believe that DENTSPLY s innovative product pipeline, stabilizing U.S. and Western European markets, strong balance sheet and robust cash flow generation ability are key growth catalysts. The company expects to continue its share buyback program and pursue strategic acquisitions based on improving liquidity and cash flow position. SUMMARY DATA 52-Week High $56.03 52-Week Low $44.34 One-Year Return (%) 11.96 Beta 1.34 Average Daily Volume (sh) 1,093,666 Shares Outstanding (mil) 140 Market Capitalization ($mil) $7,176 Short Interest Ratio (days) 6.02 Institutional Ownership (%) 92 Insider Ownership (%) 3 Annual Cash Dividend $0.26 Dividend Yield (%) 0.52 5-Yr. Historical Growth Rates Sales (%) 8.2 Earnings Per Share (%) 7.2 Dividend (%) 7.7 using TTM EPS 20.5 using 2015 Estimate 20.1 using 2016 Estimate 18.5 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 4 - Sell Risk Level * Type of Stock Low, Large-Blend Industry Med/Dental-Supp Zacks Industry Rank * 181 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 732 A 761 A 704 A 754 A 2,951 A 2014 730 A 765 A 708 A 719 A 2,923 A 2015 693 E 729 E 683 E 702 E 2,807 E 2016 2,891 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.52 A $0.66 A $0.57 A $0.61 A $2.35 A 2014 $0.59 A $0.69 A $0.62 A $0.60 A $2.50 A 2015 $0.57 E $0.69 E $0.64 E $0.65 E $2.55 E 2016 $2.77 E Projected EPS Growth - Next 5 Years % 11.3 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in York, PA, DENTSPLY International Inc. (XRAY) is a global leader in the design, development, manufacture and marketing of dental consumables, dental laboratory products, dental specialty products and consumable medical device products. The company has global operations with sales in more than 120 countries. DENTSPLY has four product categories Dental Consumable (28% of net sales), Dental Laboratory (10%), Dental Specialty (49%) and Consumable Medical Device (13%). Dental Consumable products comprise dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. Small equipment products include dental handpieces, intraoral curing light systems, dental diagnostic systems and ultrasonic scalers and polishers. Dental Laboratory products consist of dental prosthetics (including artificial teeth), precious metal dental alloys, dental ceramics and crown and bridge materials. Equipment includes computer aided design and machining (CAD/CAM), ceramic systems and porcelain furnaces. Dental Specialty products offer endodontic (root canal) instruments and materials, implants and related products, bone grafting materials, 3D digital scanning and treatment planning software, dental and orthodontic appliances and accessories. Consumable Medical Device products consist of urology catheters, certain surgical products, medical drills and other products. Net sales, excluding precious metal content, increased 0.8% year over year to $2.79 billion in 2014. DENTSPLY reports operations primarily under three segments Dental Consumables and Certain International businesses (approximately 25% of net sales), Dental Specialty and Laboratory and Certain Global Distribution businesses (approximately 56%), and Healthcare and Emerging Markets businesses (approximately 19%). REASONS TO BUY DENTSPLY is benefiting from the gradual recovery of the economy in the U.S. and Western Europe.. Not viewed as a life-sustaining product, the dental market was badly affected by the economic downturn that resulted in patients deferring its adoption. We believe that stable U.S. and European dental markets will help in improving the company s top-line growth, going forward. Emerging markets (Asia-Pacific & the Middle East/Africa) offer healthy growth opportunities on a long-term basis, as they remain vastly untapped with low dental products penetration. Approximately 82% of global population resides in these regions. A growing middle-class with improving discretionary spending bodes well for the company in our view. DENTSPLY s dual branding strategy in emerging markets is a major positive in this regard. DENTSPLY s overall growth strategy rests on product innovation. The company s solid internal growth, despite challenging macroeconomic headwinds, is primarily driven by its innovative new products. The company pursues several research and development (R&D) initiatives to support Equity Research XRAY Page 2
technological development. The company s diversified product portfolio and recurring revenue base are key growth catalysts in the long run. DENTSPLY is focusing on improving operating cost structure that will help it to achieve 20% operating margin target by 2017. The company is negotiating with Works Council in Germany to improve the performance of the European lab business. It also plans to consolidate or reduce certain low-margin product lines, which will improve asset turns and overall return on invested capital (ROIC). DENTSPLY has a strong balance sheet and generates significant cash flow, which makes it an attractive stock for investors. The company recorded a robust cash flow from operations of $322.9 million in 2014. We believe that the strong cash flow generation ability will help the company to make further investments in product development as well as acquisitions and share repurchases over the long term. REASONS TO SELL The implementation of the medical device excise tax of 2.3% on U.S. sales of medical products from Jan 2013 is a headwind. The new law or any future legislation could reduce sales volumes, lower reimbursement and impact the demand or the prices of the company s products. Although U.S. and Western Europe is stabilizing, volatility in the CIS region, particularly in Russia and Ukraine, does not bode well for DENTSPLY. Further, in the emerging markets, the company noted that Brazil is slowing down and Japan continues to remain a tough market for sales growth. We believe that this gloomy macro-economic environment will hurt the company s overall growth in the near term. DENTSPLY has significant international presence. Therefore, a strengthening U.S. dollar, especially against the euro, as well as emerging market currencies negatively impacts the company s results. We believe that currency volatility will remain a headwind, at least for the next couple of quarters in 2015. DENTSPLY conducts its operations, both domestic and foreign, under highly competitive market conditions. The size and number of the company s competitors vary by product line and from region to region. The company faces significant pricing pressure due to intensifying competition. RECENT NEWS Fourth Quarter Highlights Feb 18, 2015 DENTSPLY reported fourth-quarter 2014 EPS of $0.60, which missed the Zacks Consensus Estimate by $0.01. Moreover, EPS decreased 1.6% from the year-ago quarter, owing to revenue decline. Revenues declined 4.6% year over year to $719 million in the quarter, which missed the consensus mark of $748 million. Excluding precious metals content, sales decreased 3.2% from the year-ago quarter to $691 million. DENTSPLY s top line continues to suffer on account of a sluggish market in Europe and negative impact of foreign exchange. Equity Research XRAY Page 3
Gross margin expanded 120 basis points (bps) on a year-over-year basis to 54.7%. Selling, general & administrative expenses (SG&A) decreased 3.1% from the year-ago quarter to $283.2 million. Operating margin excluding one-time items expanded 50 bps year over year to 18.7% owing to higher gross margin base. DENTSPLY exited the fourth quarter with cash and cash equivalents of $151.6 million as compared with $97.7 million in the previous quarter. Total debt stood at approximately $1.15 billion as of Dec 31, 2014 as against $1.17 billion as of Sep 30, 2014. Outlook DENTSPLY expects the global dental markets to remain mixed with modest improvement in the U.S. and continued but slow growth across most of Europe. Foreign exchange volatility is expected to represent a sizeable headwind in 2015. Management believes that its ongoing efficiency program will help it to offset this negative to some extent. For 2015, adjusted EPS is expected in the range of $2.50 to $2.60. At the mid-point, EPS is 2% higher than $2.50 reported in 2014. Equity Research XRAY Page 4
VALUATION DENTSPLY shares are trading at 20.5x TTM earnings, a discount to the peer group average of 23.8x and the S&P 500 average of 18.2x. The TTM multiple is closer to the high-end of the historical range of 14.9x to 21.9x TTM earnings, indicating limited upside potential. The stock is trading at 20.1x our forward earnings estimates for 2015, almost 13% discount to the peer group average of 23.1x. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low DENTSPLY International Inc. (XRAY) 20.1 18.5 11.3 14.6 20.5 21.9 14.9 Industry Average 23.1 22.0 13.9 21.0 23.8 52.8 18.3 S&P 500 16.6 15.4 10.7 14.5 18.2 18.4 12.0 CR Bard Inc. (BCR) 18.7 16.9 12.1 15.2 20.1 24.9 13.4 Patterson Companies (PDCO) 22.0 20.3 9.9 19.5 22.3 22.6 13.7 Steris Corp (STE) 23.4 21.0 10.0 17.9 24.4 24.7 12.8 The Cooper Companies Inc.(COO) 24.8 21.5 12.3 18.3 26.0 25.1 13.7 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow DENTSPLY International Inc. (XRAY) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 3.2 3.2 2.3 14.6 0.5 0.5 13.9 Industry Average 4.1 4.1 4.1-3.4 0.3 0.4 7.7 S&P 500 6.2 9.8 3.2 25.4 N/A 2.0 N/A Equity Research XRAY Page 5
Earnings Surprise and Estimate Revision History Equity Research XRAY Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of XRAY. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform - 15.1%, Neutral - 75.0%, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research XRAY Page 7