Rating Update: Stock Rating C-Neutral (11/4/19)-DENTSPLY SIRONA Inc (XRAY).

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BUSINESS

DENTSPLY SIRONA Inc. designs, develops, manufactures, and markets various dental and oral health products, and other consumable healthcare products primarily for the professional dental market worldwide. The company operates in two segments, Technologies & Equipment; and Consumables. Its dental supplies include endodontic instruments and materials, dental anesthetics, prophylaxis pastes, dental sealants, impression materials, restorative materials, tooth whiteners, and topical fluoride products; and small equipment products comprise dental hand pieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers. The company also offers dental laboratory products, such as dental prosthetics that include artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials.
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INVESTMENT RATING

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XRAY’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a Value Builder.

DENTSPLY SIRONA has a current Value Trend Rating of C (Neutral).
This rating combines contradictory signals from two proprietary PTR measures of a stock’s attractiveness. DENTSPLY SIRONA has a slightly negative Appreciation Score of 35 but a good Power Rating of 74, with the Neutral Value Trend Rating the result.

DENTSPLY SIRONA’s stock is selling above targeted value. The current stock price of $56.11 compares to targeted value 12 months forward of $50.
This moderately low appreciation potential results in an appreciation score of 35 (65% of the universe has greater appreciation potential.)
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DENTSPLY SIRONA has a Power Rating of 74. (XRAY’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 26% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and the recent trend in XRAY’s earnings estimates has been favorable. An offsetting factor is is currently in an unfavorable positi.

INVESTMENT PROFILE

XRAY’s financial strength is high. Financial strength rating is 70.
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Relative to the S&P 500 Composite, DENTSPLY SIRONA Inc has slightly more Value than Growth characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that XRAY is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, and low historical growth. XRAY’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. XRAY has low market capitalization.

CURRENT SIGNALS

DENTSPLY SIRONA’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

DENTSPLY SIRONA’s current technical position is very strong. The stock price is in a 7.9 month up move. The stock has appreciated 71.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

DENTSPLY SIRONA Inc (NASDAQ: XRAY) has recently enjoyed meaningful positive changes in investment behavior: positive upside/downside volume developed.
The stock is currently rated C.
DENTSPLY SIRONA Inc (NASDAQ: XRAY) stock suffered a major decline of -16.7% on 11/4/19. The shares closed at $1.00. This decline was accompanied by normal trading volume. Relative to the market the stock has been strong over the last nine months and has risen 5.7% during the last week.

CASH FLOW

In 2018, DENTSPLY SIRONA experienced a significant decline in cash of -$65.4 million (-17%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$740.7 million. Non-operating uses consumed -$1,331.1 million (-180% of EBITDA). Cash taxes consumed -$217.7 million (-29% of EBITDA). Withdrawal of investment from the business totalled +$1,248.6 million (+169% of EBITDA). On a net basis, debt investors withdrew -$21.7 million (-3% of EBITDA) while equity investors removed -$484.2 million (-65% of EBITDA).
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DENTSPLY SIRONA’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Dentsply Sirona Inc Peer Group. In most years, DENTSPLY SIRONA was in the top quartile and lower quartile. Currently, DENTSPLY SIRONA is lower quartile at -180% of EBITDA (-$1,331.1 million).

DENTSPLY SIRONA’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Dentsply Sirona Inc Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, DENTSPLY SIRONA was in the top quartile and lower quartile. Currently, DENTSPLY SIRONA is lower quartile at -29% of EBITDA (-$217.7 million).

DENTSPLY SIRONA’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Dentsply Sirona Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, DENTSPLY SIRONA was in the top quartile and second quartile. Currently, DENTSPLY SIRONA is upper quartile at +169% of EBITDA (+$1,248.6 million).

DENTSPLY SIRONA’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Dentsply Sirona Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, DENTSPLY SIRONA was in the third quartile and second quartile. Currently, DENTSPLY SIRONA is slightly below median at -3% of EBITDA (-$21.7 million).

DENTSPLY SIRONA’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Dentsply Sirona Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, DENTSPLY SIRONA was in the lower quartile and second quartile. Currently, DENTSPLY SIRONA is lower quartile at -65% of EBITDA (-$484.2 million).

DENTSPLY SIRONA’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Dentsply Sirona Inc Peer Group. (Since 2014 Change in Cash, %EBITDA has experienced a very sharp decline.) In most years, DENTSPLY SIRONA was in the second quartile and third quartile. Currently, DENTSPLY SIRONA is slightly below median at -9% of EBITDA (-$65.4 million).
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DENTSPLY SIRONA’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Dentsply Sirona Inc Peer Group. In most years, DENTSPLY SIRONA was in the lower quartile and third quartile. Currently, DENTSPLY SIRONA is at the lower quartile at +8%.

PROFITABILITY

DENTSPLY SIRONA’s return on equity has eroded very significantly since 2009 even as it experienced a very sharp recovery after the 2017 low.
This very significant erosion was due to very strong negative trend in pretax operating return supported by very strong negative trend in non-operating factors.
The productivity of DENTSPLY SIRONA’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend even as it experienced a very sharp recovery after the 2016 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend even as it experienced a very sharp recovery after the 2017 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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DENTSPLY SIRONA’s return on equity is upper quartile (2.0%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is upper quartile (2.5%) reflecting asset turnover that is at median (0.46X) and upper quartile pretax margin (5.3%).
Tax “keep” rate (income tax management) is lower quartile (50.1%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is substantially below median (1.66X).

GROWTH RATES

Overall, DENTSPLY SIRONA’s growth rate has slowed very considerably in recent years.
DENTSPLY SIRONA’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 0.8% per year. (More recently it has been -2.6%.)

Total asset growth has been 6.3% per year. (More recently it has been -9.3%.)

Annual E.P.S. growth has been 2.1% per year.

Equity growth has been 8.9% per year. (More recently it has been -13.8%.)

DENTSPLY SIRONA’s consensus growth rate forecast (average of Wall Street analysts) is 13.6% — substantially above the average of the historical growth measures.
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Relative to the Dentsply Sirona Inc Peer Group, DENTSPLY SIRONA’s historical growth measures are generally second quartile. Equity growth (8.9%) has been upper quartile. Total asset growth (6.3%) has been substantially above median. E.P.S. growth (2.1%) has been above median. Revenue growth (0.8%) has been at median.

In agreement with this pattern, consensus growth forecast (13.6%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, DENTSPLY SIRONA’s stock price performance has been below market. Between January, 2009 and November, 2019, DENTSPLY SIRONA’s stock price rose +109%; relative to the market, this was a -44% loss. Significant price move during the period: 1) September, 2011 – November, 2017: +118%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 59.4% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of 59.4% is upper quartile relative to DENTSPLY SIRONA Inc Peer Group.

Current 5-year total return performance of 2.2% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of 2.2% relative to S&P 500 Composite, DENTSPLY SIRONA’s total return performance is upper quartile relative to DENTSPLY SIRONA Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, XRAY’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/revenue is slightly above median. Ratio of enterprise value/assets is slightly above median. The lowest factor, the price/equity ratio, is below median.

Relative to DENTSPLY SIRONA Inc Peer Group, XRAY’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/equity ratio is upper quartile. Price/earnings ratio is at the upper quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is at the upper quartile.
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DENTSPLY SIRONA has a major value gap compared to the median valuation. For XRAY to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.55X to 1.48X. If XRAY’s ratio of enterprise value/revenue were to fall to 1.48X, its stock price would be lower by $-36 to $20.
For XRAY to fall to lower quartile valuation relative to the DENTSPLY SIRONA Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.55X to 0.97X. If XRAY’s ratio of enterprise value/revenue were to fall to 0.97X, its stock price would decline by $-45 from the current level of $56.

VALUE TARGETS

XRAY’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a Value Builder.
DENTSPLY SIRONA’s current Price Target of $51 represents a -9% change from the current price of $56.11.
This moderately low appreciation potential results in an appreciation score of 35 (65% of the universe has greater appreciation potential.)
Notwithstanding this moderately low Appreciation Score of 35, the high Power Rating of 74 results in an Value Trend Rating of C.
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DENTSPLY SIRONA’s current Price Target is $51 (+64% from the 2018 Target of $31 but -9% from the 11/04/19 price of $56.11). This dramatic rise in the Target is the result of a +2% increase in the equity base and a +60% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a slight negative impact.
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PTR’s return on equity forecast is 11.7% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2011 peak of 16%.

PTR’s growth forecast is 6.0% — below our recent forecasts. Forecasted growth exhibited a modest, erratic increase between 2010 and 2018. The current forecast is below the 2013 peak of 10%.

PTR’s cost of equity forecast is 7.8% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is steady at the 2010 peak of 8.4%.
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At DENTSPLY SIRONA’s current price of $56.11, investors are placing a positive value of $30 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 12.0% per year, and a return on equity of 8.6% versus a cost of equity of 8.0%.
PTR’s 2020 Price Target of $51 is based on these forecasts and reflects an estimated value of existing assets of $39 and a value of future investments of $12.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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