Medical Stocks

Henry Schein Inc. Analysis – Initial Coverage $HSIC

henry schein logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Henry Schein Inc. (HSIC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Henry Schein, Inc. provides health care products and services to office-based dental animal health and medical practitioners. The Company operates its business through two segments: health care distribution and technology and value-added services. The health care distribution segment distributes consumable products, laboratory products, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins, among others. The Company’s global technology and value-added services segment provides software, technology and other value-added services to health care practitioners. Its offerings include practice management software systems for dental and medical practitioners and animal health clinics. Its value-added practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, as well as continuing education services for practitioners.

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Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - FAIL
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $146.86
MG Value $126.38
MG Opinion Overvalued
Value Based on 3% Growth $76.04
Value Based on 0% Growth $44.57
Market Implied Growth Rate 9.75%
Net Current Asset Value (NCAV) -$4.77
PEmg 28.01
Current Ratio 1.81
PB Ratio 4.55

Balance Sheet – March 2015

Current Assets $2,802,000,000
Current Liabilities $1,547,000,000
Total Debt $654,000,000
Total Assets $5,939,000,000
Intangible Assets $2,457,000,000
Total Liabilities $3,206,000,000
Outstanding Shares 84,700,000

Earnings Per Share

2015 (estimate) $5.90
2014 $5.44
2013 $4.93
2012 $4.32
2011 $3.97
2010 $3.49
2009 $3.44
2008 $2.63
2007 $2.36
2006 $1.82
2005 $1.58

Earnings Per Share – ModernGraham

2015 (estimate) $5.24
2014 $4.75
2013 $4.28
2012 $3.83
2011 $3.45
2010 $3.04

Dividend History
Henry Schein Inc. does not pay a dividend.

Free Cash Flow


Henry Schein Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, lack of dividends, as well as the high PEmg and PB ratios.  The Enterprising Investor is only concerned by the lack of dividends.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.45 in 2011 to an estimated $5.24 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 9.75% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Henry Schein Inc. (HSIC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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