DENTSPLY Reaffirmed Neutral

We reiterate our Neutral recommendation on leading dental products maker DENTSPLY International (XRAY). Earnings for first-quarter fiscal 2011 beat the Zacks Consensus Estimate by a penny. Profit climbed at a double-digit clip on the back of top line growth and lower restructuring costs.

Sales (up 4.5% year over year) also beat the Zacks Consensus Estimate, driven by higher revenues from dental consumable and specialty products, backed by recovery in the global dental market and new product launches.

Moreover, currency exchange movements favorably impacted sales in the quarter. Geographically, internal growth was positive in the U.S. (1.1%), Europe (4.1%) and the rest of the world (8.4%).

DENTSPLY’s diversified product portfolio is a natural hedge against any significant sales shortfall in a volatile economy. The company’s overall growth strategy rests on product innovation. DENTSPLY is poised to grow its share in the dental implant market, driven by a strong product base and significant investment on product/technology innovation and sales/marketing infrastructure.

The company has launched 20 products in the most recent quarter with a number of products lined up for launch (including the cobalt chrome disk in prosthetics) in the remainder of 2011.

DENTSPLY has a strong international presence as its products are used in over 120 countries, enabling it to leverage the changing dental practice across North America and Western Europe. One of the company’s major customers is Henry Schein Inc (HSIC), a dental products distributor.

The company’s strategic collaborations will also support growth. In a major move, DENTSPLY collaborated with GlaxoSmithKline (GSK) to develop oral care products for use in dentist offices. The deal enables the company to co-brand its NUPRO prophylaxis pastes with GlaxoSmithKline’s coveted Sensodyne toothpaste brand.

Moving forward, DENTSPLY should benefit from the gradual recovery in the global dental market. Not being a life-sustaining product, the dental market was badly affected by the economic downturn that resulted in patients deferring their adoption. The company remains optimistic that the positive internal growth, achieved in the last two quarters, to continue through 2011.

DENTSPLY’s diverse product range, significant international presence, new product introductions and acquisition initiatives are expected to boost operating metrics over the forthcoming quarters. However, we take a cautious stance as DENTSPLY’s domestic operations still remains challenged due to a slow economic recovery and competitive pressure.

We also account for the unfavorable impact of the supply chain disruption due to the earthquake and Tsunami in Japan on the company’s bottom line. Although DENTSPLY has taken proper actions to address the supply outage, the company expects such disruption to dilute its fiscal 2011 earnings, as reflected in its recent guidance.

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