Henry Schein (HSIC)

Dental and medical products company Henry Schein (NASDAQ:HSIC) reported revenue ahead of Wall Street’s expectations in Q4 CY2025, with sales up 7.7% year on year to $3.44 billion. Its GAAP profit of $0.85 per share was 16.4% below analysts’ consensus estimates.

Company Overview

With a vast inventory of over 300,000 products stocked in distribution centers spanning more than 5.3 million square feet worldwide, Henry Schein (NASDAQ:HSIC) is a global distributor of healthcare products and services primarily to dental practices, medical offices, and other healthcare facilities.

The dental equipment and technology industry encompasses companies that manufacture orthodontic products, dental implants, imaging systems, and digital tools for dental professionals. These companies benefit from recurring revenue streams tied to consumables, ongoing maintenance, and growing demand for aesthetic and restorative dentistry. However, high R&D costs, significant capital investment requirements, and reliance on discretionary spending make them vulnerable to economic cycles. Over the next few years, tailwinds for the sector include innovation in digital workflows, such as 3D printing and AI-driven diagnostics, which enhance the efficiency and precision of dental care. However, headwinds include economic uncertainty, which could reduce patient spending on elective procedures, regulatory challenges, and potential pricing pressures from consolidated dental service organizations (DSOs).

Henry Schein's primary competitors in the dental market include Patterson Companies (NASDAQ:PDCO) and Benco Dental Supply Company, while in the medical market, it competes with McKesson Corporation (NYSE:MCK) and Medline Industries. In the healthcare software space, competitors include Carestream Dental, CareStack, and Curve Dental.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $13.18 billion in revenue over the past 12 months, Henry Schein has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Henry Schein’s sales grew at a mediocre 5.4% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Henry Schein’s recent performance shows its demand has slowed as its annualized revenue growth of 3.4% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Henry Schein’s organic revenue averaged 1.3% year-on-year growth. Because this number is lower than its two-year revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Henry Schein reported year-on-year revenue growth of 7.7%, and its $3.44 billion of revenue exceeded Wall Street’s estimates by 2.8%.

Looking ahead, sell-side analysts expect revenue to grow 2.8% over the next 12 months, similar to its two-year rate. This projection is underwhelming and implies its newer products and services will not accelerate its top-line performance yet.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Henry Schein was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.5% was weak for a healthcare business.

Analyzing the trend in its profitability, Henry Schein’s operating margin decreased by 1.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Henry Schein’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q4, Henry Schein generated an operating margin profit margin of 4.7%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Henry Schein’s EPS grew at an unimpressive 3.1% compounded annual growth rate over the last five years, lower than its 5.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of Henry Schein’s earnings can give us a better understanding of its performance. As we mentioned earlier, Henry Schein’s operating margin was flat this quarter but declined by 1.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Henry Schein reported EPS of $0.85, up from $0.75 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Henry Schein’s full-year EPS of $3.27 to grow 31.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Henry Schein has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.4%, subpar for a healthcare business.

Henry Schein’s free cash flow clocked in at $338 million in Q4, equivalent to a 9.8% margin. This result was good as its margin was 4.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Henry Schein’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 10.2%, slightly better than typical healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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.

Henry Schein reported $156 million of cash and $3.44 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.1 billion of EBITDA over the last 12 months, we view Henry Schein’s 3.0× net-debt-to-EBITDA ratio as safe. We also see its $57 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Henry Schein beat analysts’ revenue expectations this quarter. We were also glad its organic revenue outperformed Wall Street’s estimates. On the other hand, its EPS missed. Zooming out, we think this was a mixed quarter. The stock traded up 1.2% to $81.55 immediately after reporting.

Before investing in or passing on Henry Schein, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Henry Schein isn’t a terrible business, but it doesn’t pass our quality test. First off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. While its scale and strong customer awareness give it negotiating power, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its organic revenue growth has disappointed.

Henry Schein’s P/E ratio based on the next 12 months is 15.2x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $78.14 on the company (compared to the current share price of $81.55).