In this article, let's take a look at DENTSPLY International Inc. (XRAY, Financial), a $7.56 billion market cap company, which is a designer, developer, manufacturer and marketer of a broad range of products for the dental market.
Acquisition Opportunities
The company is a leader in the dental market. This position was gained through its product portfolio, its focus on innovation and several acquisitions.
It has made more than 20 acquisitions in the last five years. The acquisition of Astra Tech, a major dental implants maker in 2011, helped the implant capabilities while expanding its products offerings. Further, it has an ownership interest in a Korean manufacturer. This shows the global exposure to dental markets around the world in fast-growing markets.
Looking back, there were other important acquisitions. In 2010, it acquired small dental distributorships in Europe and Asia. One year before, it acquired a small sales and marketing organization of 3D digital implantology products.
Lower-priced competitors are a concern. Dental distributor like Henry Schein (HSIC, Financial) is an example of that. This constitutes a threat to the firm and must continue with innovation in order to compete in a highly competitive sub-industry.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 0.59% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.52 vs $0.55).
The gross profit margin is considered rather high, at 59.40%. It has increased from the same quarter the previous year. The net margin is 10.57% which is ranked higher than 85% of the 287 Companies in the Medical Instruments & Supplies industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| XRAY | DENTSPLY | 12.43 |
| HAE | Haemonetics Corp | 3.70 |
| WST | West Pharmaceutical Services Inc. | 12.91 |
| COO | Cooper Companies | 10.70 |
| ALR | Alere Inc | -7.15 |
| Â | Industry Median | 7.72 |
The company has a current ROE of 12.43% which is higher than the industry median and the ones exhibit by Haemonetics Corp (HAE, Financial), Cooper Companies (COO, Financial) and Alere Inc. (ALR, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, West Pharmaceutical Services (WST, Financial) is closer to that level. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 24.8x, trading at a discount compared to an average of 42.0x for the industry. To use another metric, its price-to-book ratio of 3.03x indicates a discount versus the industry average of 3.38x while the price-to-sales ratio of 2.61x is below the industry average of 2.64x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $16.836, which represents a 11% compound annual growth rate (CAGR).
Final Comment
The demand in the dental industry is recovering due to an aging population and a growing middle class in emerging markets. We believe the acquisition of Astra Tech was good bet and considering other acquisitions we can say they have benefited the company.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Jean-Marie Eveillard (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
