Investment Alert: 32.5% Upside In Under-the-Radar Healthcare Stock

Ivy Investment Alert: Buy Henry Schein Under $80/share

Disclaimer: Ivy Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.

Key Points

1. Henry Schein is a healthcare solutions provider that has consistently delivered stable revenues and positive operating income for the past decade. The company operates in several healthcare segments, including dental, medical, and animal health, which helps to mitigate overall risk.
2. The company’s focus on innovation and strategic partnerships, combined with its strong financials and low debt levels, has enabled it to maintain a competitive edge and drive growth.
3. While Henry Schein’s revenue growth may not be as explosive as some up-and-coming stocks, its stability and predictability make it a solid choice for investors seeking steady, long-term appreciation. Furthermore, its current share price is undervalued compared to its financial performance, with a discounted cash flow forecast projecting an upside of 32.5% if fair value is realized.

Investment Thesis

Scouring the portfolio holdings of billion dollar fund managers can uncover some real gems. After digging through a decade of data, I found one under-the-radar healthcare stock has been a persistent holding of a nearly $20 billion fund that has allocated close to a billion dollars to it. And after running the numbers I can see why.

But first, what does Henry Schein actually do?

Henry Schein is a provider of healthcare solutions to dental and medical practitioners, animal health clinics, and government and institutional healthcare facilities. In some ways, it’s quite a steady-as-she-goes company that simply does the basics well, and that translates into a relatively boring share price. But not one that should be ignored. In the last 10 years, it has produced a 3x return on investment with few periods of volatility, other than the pandemic era.

The bull case for Henry Schein can be summarized as follows:

1. Stable Revenues: Henry Schein has a strong market position in the dental and medical industries, and its products and services are essential to healthcare professionals. This makes the company less susceptible to economic downturns and provides a stable revenue stream.
2. Diversified Business Segments: The company operates in several healthcare segments, including dental, medical, and animal health. This diversification helps the company to withstand fluctuations in any one segment and mitigates overall risk.
3. Strategic Partnerships: Management has a history of executing well on acquisitions and partnerships, which have helped the company to expand its reach and product offerings.
4. Focus on R&D: The company invests heavily in research and development to improve its products and services, and to develop new solutions for its customers. This focus on innovation helps to maintain the company’s competitive edge and drive growth.
5. Excellent Financials: Henry Schein has a strong balance sheet, with low debt levels and healthy cash flows. The company has consistently delivered strong financial performance, with steady revenue growth and profitability.

Financials & Valuation

Henry Schein revenue growth won’t blow you away like an up-and-comer stock. In a tortoise vs hare race, this is your tortoise. But let’s not forget the tortoise won in the end. So, if you’re looking for excitement, look elsewhere. What makes Henry Schein so attractive is the predictability of its revenues. We analyzed ten years of financials and didn’t find a single year-over-year dip in all that time. That’s the kind of consistency you want to see in a long-term portfolio, steady long-term appreciation.

Another factor in favor of Henry Schein is that operating income has been positive for a decade too. It’s generally in or around the $750 million range from one year to the next. The stability in operating income while revenues rise is a function it seems of growing SG&A.

When we ran the forecast projections, we arrived at modest revenue growth projections but a very compelling valuation. Whether comparing Price-to-book multiples, price-to-earnings multiples or EBIT multiples, all the valuations came in above the current share price level. Ultimately we arrived at a discounted cash flow forecast of $106 per share, which would translate to upside of 32.5% if fair value is realized.