In light of this morning’s worse than expected full year 2017 outlook – which was lowered – shares of medical products company Henry Schein (HSIC 71.07, -6.57 -8.5%) trade to two-year lows. The stock is equally pressured by the company’s mixed Q3 report and the worse than expected 2018 guidance.
Some of you may not be familiar with the Henry Schein, so let’s take a quick look at the company before we get into the earnings and guidance. HSIC mainly provides health care products and services to office-based dental, animal health, and medical practitioners. The company also serves dental laboratories, government and institutional health care clinics, and other alternate care sites. The company operates through a centralized and automated distribution network and a few months ago finalized 2016 sales of $11.6 billion.
Flipping back to the earnings and guidance, HSIC reported worse than expected Q3 earnings of $0.87 per share. Revenues rose about 10% to $3.16 billion this period and modestly beat market expectations.
Breaking down the revenue beat, dental sales of $1.5 billion were up 11.1% this period, consisting of 9.1% growth in local currencies and a 2.0% increase related to foreign currency exchange. In local currencies, internal sales growth was 1.6% and acquisition growth was 7.5%. The 1.6% internal growth in local currencies included 0.8% growth in North America and 3.2% growth internationally.
Next, Animal Health sales of $882.6 million were up 11.7%, consisting of 9.9% growth in local currencies and a 1.8% increase related to foreign currency exchange. In local currencies, internal sales growth was 8.0% and acquisition growth was 1.9%. The 8.0% internal growth in local currencies included 9.0% growth in North America, which was negatively impacted by approximately 50 basis points due to recent hurricanes, and 6.9% growth internationally.
Also, Medical sales of $690.8 million grew 8.0%, consisting of 7.9% growth in local currencies, and a 0.1% increase related to foreign currency exchange. In local currencies, internal sales growth was 7.8%, which was negatively impacted by approximately 25 basis points due to recent hurricanes, and acquisition growth was 0.1%.
Lastly, Technology and Value-Added Services sales of $109.0 million increased 4.1%, including 3.7% growth in local currencies and a 0.4% increase related to foreign currency exchange. In local currencies, internal sales growth was 3.0% and acquisition growth was 0.7%.
As for guidance, HSIC is adjusting its 2017 full year EPS guidance range to reflect growth of about 12% on a GAAP basis, versus the comparable 2016 results. This reflects growth of 8% to 9% on a non-GAAP basis, which excludes litigation settlement expenses and a fourth quarter loss associated with HSIC’s divestiture of its equity ownership in E4D Technologies, versus the comparable 2016 results. Specifically, the company now sees FY17 EPS between $3.59-3.61 (from previous $3.59-3.65). As a small caveat, HSIC noted that fiscal year 2017 includes one less week than fiscal year 2016.
The company also is introducing 2018 EPS guidance that reflects growth of 11% to 14% compared with the midpoint of the company's 2017 GAAP guidance range and 7% to 10% compared with the midpoint of the company's 2017 non-GAAP guidance range. Specifically, HSIC sees FY18 EPS of $3.85-3.96.
Since the Q2 report back in early-August, shares of HSIC have been on a decidedly downward trajectory – losing about 22% since that time. Further, since about October 26, shares of HSIC – and med-tech peer Patterson Companies (PDCO 35.42, -0.73 -2.02%) which in turn trades at 52-week lows – have received added pressured stemming from retail giant Amazon’s (AMZN 1120.80, +9.20 +0.83%) receipt of pharmacy licenses in several states. The fear is that AMZN could encroach on HSIC’s medical sales, which as mentioned, totaled $690.8 million in the quarter.