Goldman Sachs: Muted Margin Opportunity Puts Henry Schein's EPS Growth At Risk

Henry Schein, Inc. (NASDAQ: HSIC) announced Monday its decision to spin-off its Animal Health business and merge it with Vets First Choice, with the combined company to trade as an independent public company.

Against the backdrop, Goldman Sachs previewed Q1 results of the dental supplies companies.

The Analyst

Goldman Sachs analyst Robert Jones downgraded Henry Schein from Buy to Neutral and lowered his 12-month price from $84 to $72.

The Thesis

Following disappointing Q1 results from Danaher Corporation (NYSE: DHR), and lingering company-specific headwinds, more cautious updates from the dental names are likely, Jones said in a Tuesday note.

The analyst sees less margin opportunity for Henry Schein, as price competition, mix shifts and customer consolidation weigh on out-year margins.

"Based on our new analysis of segment margins, we arrive at overall EBIT margin forecasts well below the Street for 2018E-2020E by assuming Dental margins simply decline at a similar pace as we estimate they have for the past two years (2016-2017)," the analyst said.

This, according to the analyst, puts the company's long-standing high-single-digit/low-double-digit earnings per share growth at risk.

In a note released Monday, Jones noted the remaining company after the proposed spin-off of the Animal Health business will have greater exposure to the Dental and Medical business, both of which have faced structural pressures including customer consolidation and the presence of Amazon.com, Inc. (NASDAQ: AMZN) in the space.

Price Action

Henry Schein shares were up just 1.2 percent for the year-to-date period. Monday's announcement sent shares soaring by 6.8 percent to $73.79.

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