Henry Schein has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 7.2% to $81.63 per share while the index has gained 6.2%.
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Why Is Henry Schein Not Exciting?
We’re cautious about Henry Schein. Here are three reasons why HSIC doesn’t excite us, plus one stock we’d rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
In addition to reported revenue, organic revenue is a useful data point for analyzing Dental Equipment & Technology companies. This metric gives visibility into Henry Schein’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Henry Schein’s organic revenue averaged 1.9% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Henry Schein’s revenue to rise by 3.7%, close to its 4.7% annualized growth for the past five years. This projection doesn’t excite us and suggests its newer products and services will not catalyze better top-line performance yet.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Henry Schein’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Henry Schein isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 15.2× forward P/E (or $81.63 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
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