One of Wall Street's biggest winners of the day is Henry Schein, a medical specialities company whose shares have climbed 3.0% to a price of $78.08 -- 6.3% below its average analyst target price of $83.33.
The average analyst rating for the stock is hold. HSIC may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 18.0% over the last year, returning 2.6%.
Henry Schein, Inc. provides health care products and services to dental practitioners and laboratories, physician practices, ambulatory surgery centers, government, institutional health care clinics, and other alternate care clinics worldwide. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Henry Schein's trailing 12 month P/E ratio is 22.6, based on its trailing EPS of $3.46. The company has a forward P/E ratio of 13.7 according to its forward EPS of $5.72 -- which is an estimate of what its earnings will look like in the next quarter.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US health care companies is 24.45, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
HSIC’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Henry Schein, we obtain a PEG ratio of 2.02, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Henry Schein's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
HSIC's gross profit margins have averaged 29.7% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -0.5%.
Henry Schein's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 602,000 | -96,000 | 506,000 | -19.75 |
| 2021-12-31 | 709,580 | -79,015 | 630,565 | 14.63 |
| 2020-12-31 | 598,910 | -48,829 | 550,081 | -4.81 |
| 2019-12-31 | 654,087 | -76,219 | 577,868 | n/a |
- Average free cash flow: $566.13 Million
- Average free cash flown growth rate: -3.3 %
- Coefficient of variability (lower numbers indicating more stability): 9.2 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, HSIC is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Henry Schein has a P/B ratio of 2.95. This indicates that the market value of the company exceeds its book value by a factor of more than 2, but is still below the average P/B ratio of the Health Care sector, which stood at 4.16 as of the first quarter of 2023.
Henry Schein is by most measures fairly valued because it has an average P/E ratio, a lower P/B ratio than its sector average, and a steady stream of strong cash flows with a flat trend. The stock has poor growth indicators because it has a an inflated PEG ratio and weak operating margings with a stable trend. We hope you enjoyed this overview of HSIC's fundamentals.
