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Drilling For Profit At The Dentist's Office

Posted: Feb 28, 2008 15:15 PM by Will Ashworth

Tickers in this Article: PG, HSIC, SIRO

A dentist appointment is an uncomfortable, difficult appointment to keep, and yet, as unappealing as a trip to the dentist is, we all suck it up and go every six months. Why? Because he tells us to.

This fact of life makes investing in the dental business a potentially lucrative proposition. Especially in times of economic downturn, having consistent market demand for your industry can be a great benefit. We're going to examine three firms who each have a niche role to play in the dental industry.

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Procter & Gamble (NYSE: PG)
Whether it's the Oral-B toothbrush or Crest toothpaste, this Cincinnati-based company provides both consumers and professionals with the dental care products necessary to maintain good oral hygiene. In fiscal 2007, sales for both the Oral-B and Crest products lines were in excess of $1 billion. The Health Care division (of which Oral Care plays a major part) produces 12% of the company's annual sales and 13% of its net income, and that number should steadily grow for the next several years.

P&G has undergone an innovation explosion in the last six years, doubling sales and tripling profits in its major divisions. Operating margins jumped to 20.2% in 2007 from 15.5% in 2001, resulting in net earnings of $43 billion over this period, with an increase of $100 billion in the market capitalization of its stock. Its a very efficient company, and arguably one of the best defensive plays an investor can make during times of economic downturn. (For other tips, check out Guard Your Portfolio With Defensive Stocks.)

Henry Schein (Nasdaq: HSIC)
The company is the largest distributor of health care products in the United States and Europe. If you're a dentist, there's a good chance you have a Henry Schein catalog stashed away in a drawer somewhere. The company serves 85% of all office-based dental practices in North America. That's an astronomical market share and it translates into solid bottom line profit.

Wall Street analysts estimate 2008 diluted earnings per share of $2.95-$3.00, up from $2.58 in 2007. That's 15% year-over-year growth, a respectable increase in earnings. Even though shares are trading at more than 27-times price-to-trailing-12 months earnings, its leadership position makes it an excellent investment worth considering.

Sirona Dental Systems (Nasdaq: SIRO)
Sirona manufactures X-ray machines and other high-tech equipment for dental practitioners. With an aging population requiring complex dental care, the demand for innovative dental equipment should continue for many years to come. Once owned by Siemens, the company has traded on the Nasdaq since 2006. Sales have more than doubled in the past four years, from $306 million in 2003 to $660 million in 2007.

Unfortunately, the same can't be said for operating margins, which in 2007 were half those in 2003, 8.2% versus 17.6%. However, recently announced first quarter earnings should give investors hope for the future. EBITDA margins increased from 20.7% in 2007 to 28.5% for the same three-month period in 2008. Add to that 20% international sales growth and it's likely shareholder's will see the stock price increase in the coming months. (For more on margin analysis, check out A Clear Look At EBITDA.)

The Bottom Line
If you were to assemble a dental portfolio and it could only hold three stocks, these three would be ideal. Not only does each of them operate in a different sector of the economy, they also have varying market caps, providing decent diversification. All of them serve a unique purpose in the dental care equation. Procter & Gamble provides preventative care for day-to-day maintenance. Sirona Dental Systems manufactures the equipment that makes the dental office function and Henry Schein distributes pretty much everything including Sirona's imaging systems to dentists around the world.

Next time you're sitting in that chair at the dentist's office, open your eyes and pay attention - there's profit potential all around.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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