Will Henry Schein Stock See Higher Levels After A 16% Fall This Year?

Henry Schein Action (NASDAQ
SO
: HSIC), a distributor of healthcare products and services, is trading at $67 per share, slightly below the level seen in March 2021. HSIC stock was trading at around $77 in early June 2022, just before the Fed has not started to raise rates, and is now 13% below that level, compared to gains of 21% for the S&P 500 during this period.

Longer term, HSIC stock has seen little change, falling slightly from levels of $65 in early January 2021 to around $65 now, compared to an increase of around 20% for the S&P 500 over that period of around 3 years. Overall, HSIC stock’s performance relative to the index has been quite volatile. The stock’s returns were 16% in 2021, 3% in 2022, and -16% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 19% in 2023, which indicates that HSIC underperformed the S&P in 2021 and 2023.

Actually, consistently beating the S&P 500 – in good times and bad – has been difficult in recent years for individual stocks; for healthcare heavyweights including LLY, UNH and JNJ, and even for megacaps GOOG, TSLA and MSFT. On the other hand, the Trefis High quality walletwith a collection of 30 titles, has has outperformed the S&P 500 every year during the same period. Why is that? As a group, stocks in the HQ portfolio have generated better returns with less risk relative to the benchmark and less roller coaster ride, as evidenced by HQ Portfolio Performance Metrics.

Given the current uncertain macroeconomic environment, characterized by high oil prices and high interest rates, could HSIC face a similar situation as it experienced in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a sharp rise? Returning to the pre-inflationary shock high of over $90 (seen in April 2022) means that HSIC stock will need to gain over 35% from there, and we don’t think that will materialize anytime soon. That said, HSIC stock currently trades at 0.9x earnings, below its trailing seven-quarter average of 1.1x, and appears to have some room to grow. Our detailed analysis of Henry Schein’s post-inflationary upward shock captures the company’s stock trends during the turbulent market conditions seen in 2022. It compares these trends to the stock’s performance during the 2008 recession.

Inflationary shock 2022

Timeline of the inflationary shock so far:

• 2020 – early 2021: The increase in the money supply to cushion the impact of lockdowns led to strong demand for goods; producers unable to compete.
• Early 2021: Shipping issues and labor shortages due to the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates exceed 4% and are increasing rapidly.
• Early 2022: Energy and food prices rise due to the Russian invasion of Ukraine. The Fed begins its process of raising rates.
• June 2022: Inflation levels peak at 9%, the highest level in 40 years. The S&P 500 index has fallen more than 20% from its record highs.
• July – September 2022: The Fed raises interest rates aggressively, leading to an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: the Fed continues its process of raising rates; Improving market sentiment is helping the S&P500 recover some of its losses.
• Since August 2023: The Fed has kept interest rates unchanged to allay recession fears, although a further rate hike remains on the cards.

In contrast, here is how HSIC stock and the market as a whole performed during the 2007/2008 crisis.

Chronology of the 2007-08 crisis

• 10/1/2007: Approximate pre-crisis peak of the S&P 500 index
• 09/01/2008 – 10/01/2008: Accelerated market decline corresponding to Lehman’s bankruptcy filing (09/15/08)
• 01/03/2009: Approximate low point of the S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 09/01/2008)

Henri Schein

HSIC
and performance of the S&P 500 during the 2007-08 crisis

HSIC stock fell from nearly $24 in September 2007 (pre-crisis peak) to $14 in March 2009 (when markets bottomed), implying that it lost 41% of its stock. value before the crisis. It recovered after the 2008 crisis to reach levels of around $21 in early 2010, increasing more than 43% between March 2009 and January 2010. The S&P 500 saw a 51% decline, from 1,540 in September 2007 to 757 in March 2009. It then increased by 48% between March 2009 and January 2010 to reach levels of 1,124.

Henry Schein’s fundamentals in recent years

Henry Schein’s income grew from $10.0 billion in 2019 to $12.7 billion in the last twelve months, driven by increased demand for its dental care business. The company also benefited from the sale of COVID-19 test kits and personal protective equipment during the pandemic. However, this trend has now reversed with a decline in sales of COVID-19 related products. Nonetheless, the company has managed to post sales growth in recent quarters thanks to the impact of its recent acquisitions, including Condor Dental in 2022 and a majority stake in Shield Healthcare this year.

The company’s earnings were $5.38 per share on an adjusted basis in 2022, compared to $3.51 in 2019. Given lower sales of COVID-19-related products and weak macroeconomic conditions, the company lowered its 2023 earnings outlook, now placing it in the range of $5.18 to $5.26, compared to its previous forecast of $5.18 to $5.35 earnings .

Does Henry Schein have a sufficient cash reserve to meet its obligations in the face of the ongoing inflationary shock?

Henry Schein’s total debt has grown from $1.0 billion in 2019 to $1.9 billion today, while its cash has remained around $0.1 billion over this period. The company also generated $0.6 billion in cash flow from operations in 2022. Given its cash reserve, Henry Schein appears to be able to meet its near-term obligations.

Conclusion

With the Fed’s efforts to rein in runaway inflation rates helping market sentiment, we believe HSIC stock has the potential to make more gains once fears of a potential recession subside. That said, unfavorable macroeconomic factors remain a potential risk to achieving these gains.

Although HSIC stock may see higher levels, it is useful to see how Peers of Henry Schein pricing on metrics that matter. Further valuable comparisons for companies in all industries can be found at Peer comparisons.

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