Patterson Companies, Inc. (PDCO), DENTSPLY International Inc. (XRAY), Align Technology, Inc. (ALGN): Are There Investment Opportunities at Your 6-month Teeth Cleaning?

For most Americans, going to the dentist is right up there with paying taxes as things we don’t particularly look forward to. Of course, a healthy smile is a useful thing to have, whether you’re going to a job interview or a first date. The recurring nature of the business and its increasing use of technology make it a fertile ground for investment opportunities. While the supply distribution side of the business is dominated by only a couple of companies, like Patterson Companies, Inc. (NASDAQ:PDCO) and Henry Schein, there is always room for an innovative competitor. So, which companies are worth a look?

Preventing tooth decay around the world

DENTSPLY International Inc. (NASDAQ:XRAY) has one of the largest product portfolios and geographic footprints, with operations in 120 countries as of December 2012. The company makes thousands of consumable dental products for teeth cleaning and cosmetic dental procedures, including sealants, whiteners, and alloy fillings. DENTSPLY International Inc. (NASDAQ:XRAY) also moved into the specialty arena in a big way with its 2011 purchase of implant specialist Astra Tech for $1.8 billion. While the purchase saddled the company with over $1 billion in debt, it positioned DENTSPLY International Inc. (NASDAQ:XRAY) for growth as people in developing nations spend higher amounts of their disposable income on preventive care.

In its latest fiscal year, DENTSPLY International Inc. (NASDAQ:XRAY) reported solid financial results, with increases in revenues and adjusted operating income of 15.4% and 21.1%, respectively, versus the prior year. The company’s top-line growth was enhanced by a full year of results from its acquisition of Astra Tech, as well as volume gains in its consumables segment. However, DENTSPLY International Inc. (NASDAQ:XRAY)’s operating margin continues to remain somewhat depressed due to the rising costs of manufacturing and delivering thousands of products to locations around the globe.

Getting into the back-office

Looking ahead, DENTSPLY International Inc. (NASDAQ:XRAY) is trying to offset margin erosion by increasing its sales of higher-margin technology products, like imaging equipment. That strategic focus puts Dentsply into more direct competition with Patterson Companies, Inc. (NASDAQ:PDCO), a competitor and a customer due to its roughly 33% share of the domestic dental supply market. Patterson Companies, Inc. (NASDAQ:PDCO) has used its position as a leading distributor of a diverse portfolio of dental products to increase its sales of company-branded dental equipment, which account for roughly one quarter of its total sales.

In its latest fiscal year, Patterson Companies, Inc. (NASDAQ:PDCO)’s dental segment reported mixed results, with a 4% increase in sales and flat income growth compared to the prior year. While the company’s top-line growth benefited from increases in purchases from the country’s dental offices, its operating margin was negatively impacted by continued investment in the development of its technology offerings. Patterson Companies, Inc. (NASDAQ:PDCO)’s Eaglesoft technology has an installed base of 25,000 users, out of a potential domestic market of 186,000 dentists, and is one of the company’s focus points as it tries to find higher sales growth in the dental back-office.