Henry Schein Likely To Offer Better Returns Compared To Boston Scientific Stock

We think that Henry Schein (NASDAQ: HSIC) currently is a better pick compared to Boston Scientific (NYSE: BSX). HSIC stock trades at about 0.9x trailing Revenues, compared to around 5.5x for Boston Scientific. Does this gap in Henry Schein valuation make sense? While Boston Scientific’s business has been impacted in 2020 due to deferment of elective surgeries, Henry Schein’s sales grew slightly in 2020, as the decline in dental business was more than offset by over a 200% jump in sales of PPE and other Covid-19 related products. Boston Scientific stock is being backed by investors given the expected rebound in procedure volume in 2021, implying strong sales for the company’s products. But then, Henry Schein’s dental business is also expected to rebound, and both the companies are expected to see 15% sales growth in 2021. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Boston Scientific vs. Henry Schein: HSIC stock looks very undervalued compared to BSX stock has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Henry Schein’s revenue grew 7% from $9.4 billion in 2018 to $10.1 billion in 2020, led by health care distribution, which includes consumables, equipment, generic pharmaceuticals, and diagnostics among others. The 2020 sales of $10.1 billion reflected a 1.3% y-o-y growth. Looking at Boston Scientific, total revenue grew just 1% from $9.8 billion in 2018 to $9.9 billion in 2020, partly led by higher demand for its Neuromodulation and Endoscopy products. However, 2020 marked a 7% y-o-y decline in total sales owing to the impact of the pandemic.

2. Operating Income

Henry Schein’s operating income declined from $601 million in 2018 to $535 million in 2020, reflecting a 11% drop, as revenue growth during this period was more than offset by a contraction of margins, which declined from 6.4% to 5.3% over the same period. Looking at Boston Scientific, the operating income plunged from $1.4 billion in 2018 to $(138) million in 2020. This can be attributed to margin contraction from 13.8% in 2018 to -11% in 2020. The operating margin for both the companies has declined owing to increased costs during the pandemic. For Boston Scientific, despite revenue barely growing 1%, its SG&A, R&D as well as litigation expenses increased between 2018 and 2020.

The Net of It All

Although Boston Scientific’s revenue growth and margins compares favorably with Henry Schein historically, Henry Schein’s performance has been better over the last twelve months. As such,  we think the difference in P/S multiple of 0.9x for Henry Schein versus 5.5x for Boston Scientific will likely narrow going forward. Both the companies are seeing a pickup in demand of late, as the economies open up gradually after the pandemic, and now with vaccines being approved over multiple countries, it appears that perhaps soon the worst of the pandemic will be behind us. While the rise of new Covid variants is concerning, the overall volume of elective surgeries as well as dental procedures is expected to be higher in 2021 compared to that in 2020, boding well for both BSX and HSIC stocks. Boston Scientific’s revenue is expected to grow 15% y-o-y to an estimated $11.4 billion in 2021, while Henry Schein’s revenue is also expected to grow 15% to $11.6 billion in 2021. Now that both the companies are expected to see similar top-line growth, and given the fact that Henry Schein’s business has been more resilient during the pandemic, the difference in P/S multiple with that of Boston Scientific will likely narrow, implying HSIC stock could offer better growth in the near term.

While Henry Schein stock looks undervalued, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Abbott vs Corcept Therapeutics.

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