Although the S&P 500 is down 3.2% over the past six months, Dentsply Sirona’s stock price has fallen further to $11.47, losing shareholders 9.6% of their capital. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Dentsply Sirona, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Dentsply Sirona Will Underperform?
Despite the more favorable entry price, we're swiping left on Dentsply Sirona for now. Here are three reasons we avoid XRAY and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
Investors interested in Dental Equipment & Technology companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Dentsply Sirona’s control and are not indicative of underlying demand.
Over the last two years, Dentsply Sirona’s constant currency revenue averaged 5.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Dentsply Sirona might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Dentsply Sirona’s five-year average ROIC was negative 10.6%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. New Investments Fail to Bear Fruit as ROIC Declines
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, Dentsply Sirona’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Dentsply Sirona doesn’t pass our quality test. After the recent drawdown, the stock trades at 8.2× forward P/E (or $11.47 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.
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