Morgan Stanley Downgrades Dentsply, Says 'Time For A Breather'

Morgan Stanley’s Steve Beuchaw downgraded the rating on DENTSPLY SIRONA Inc XRAY to Equal-weight, with a price target of $65.

Expressing optimism regarding the Dentsply-Sirona synergies, Beuchaw expressed caution regarding the underlying growth outlook and potential for limited upside through mid-2016, following the surge over the past 6 months.

Stock Outperformance Unlikely

“Recent performance and the'16 P/E multiple imply material fundamental outperformance is required to drive further stock outperformance over the balance of this year,” Beuchaw explained.

However, the analyst believes that fundamental outperformance was unlikely in the near term, given expectations of tough comps in the legacy Sirona business, the continuing drag on growth due to the phasing out of unprofitable lab products and slowing in the European and emerging markets.

Beuchaw also expects the early revenue synergies to be offset by potential revenue dis-synergies, which in turn would pressure organic growth during mid-2016 to below 4 percent.

Near Term Concerns

“Near term revenue optics and the multiple give us tactical concern,” Beuchaw stated, while adding that the “dental equipment industry's biannual IDS product introduction cycle introduces a biannual seasonality to the proforma XRAY model that was not present before the Sirona combination.”

The analyst expects 2Q16 and 3Q16 to be Dentsply Sirona’s slowest organic growth quarters in the next two years.

The EPS estimates for 2016 and 2017 have been lowered from $2.83 to $2.72 and from $3.28 to $3.16, respectively.