The market decided it didn’t initially like dental equipment maker Sirona Dental Systems, Inc. (NASDAQ:SIRO) third-quarter results, and subsequently marked the company down by more than 5%. Investors may well have reacted negatively to the margin declines in each of Sirona Dental Systems, Inc. (NASDAQ:SIRO)’s business segments, but that shouldn’t detract you from its positive long-term prospects. In fact, here’s why now looks like a good time to pick up the stock.
Sirona generates growth
I’ve described Sirona Dental Systems, Inc. (NASDAQ:SIRO) as a “dental equipment maker,” but this shouldn’t make you think of it as a boring low-growth company. On the contrary, it’s actually a proprietary technology company set to generate long-term growth, primarily thanks to its revolutionary CEREC CAD/CAM system. The system allows for same-day teeth restorations, and generates significant cost savings for dentists. It also allows patients to be treated more quickly, and with less intrusive procedures.
While the benefits of the system are obvious, the CEREC system’s up-front costs can be prohibitive to emerging-market customers. Indeed, it is noticeable that much of the strong growth in the third quarter came from Sirona Dental Systems, Inc. (NASDAQ:SIRO)’s U.S. and German operations. Constant currency revenue growth was up 15.7% overall with U.S. growth cited as being up a whopping 28.8%.
Furthermore, Sirona Dental Systems, Inc. (NASDAQ:SIRO) stated in its results presentation that international sales were up 10% in constant currency, “led by an exceptionally strong performance in Germany.” Going forward, it will be challenged to continue generating growth in the U.S. and Germany, while finding a way to increase penetration rates in other markets as well.
Sirona’s growth plans
Sirona’s plans to increase market penetration include its ‘CAD/CAM for Everyone’ initiative. The latter involves trying to segment the market by offering a range of products and solutions. In fact, Sirona has 25 new products in its portfolio to sell through to customers. Dentists can buy the solution best tailored to their needs, at a price point that they find comfortable.
A big part of the plan involves training Sirona Dental Systems, Inc. (NASDAQ:SIRO)’s distribution partners, principally Patterson Companies, Inc. (NASDAQ:PDCO) and Henry Schein, Inc. (NASDAQ:HSIC).
Patterson Companies, Inc. (NASDAQ:PDCO) is Sirona’s exclusive distribution partner in the U.S., and it’s notably bullish on its prospects to generate growth by distributing high-tech products such as the CEREC system. Patterson Companies, Inc. (NASDAQ:PDCO) needs to focus on these areas, because its core equipment sales to dentists have been slowing. Dentists remain cautious in their spending habits.
Sirona’s chief European distributor, Henry Schein, Inc. (NASDAQ:HSIC), has similar plans. Low growth in its dental consumables sales is spurring it to focus on selling Sirona’s systems in Europe. In summary, both distributors are a large part of the ‘CAD\CAM for Everyone’ plan, and with their distribution expertise, they should be able to sell the new products on successfully.
Margins declining, product mix responsible
Unfortunately, gross margins declined in every one of Sirona’s segments.
Source: company accounts.
However, it’s not time to panic.
Firstly, CAD/CAM margins were down thanks to increased sales of the new Omnicam camera system. Incidentally, you can learn about the differences between Omnicam and Sirona’s older system, Bluecam, in a video linked here.
