Henry Schein, Patterson Companies Downgraded On Amazon Fears

Online retailer Amazon.com, Inc. AMZN and its aggressive expansion has put many retailers in a tight spot. Most recently, an analyst expressed concerns about its challenge to dental supplies and equipment distribution companies Henry Schein, Inc. HSIC and Patterson Companies, Inc. PDCO.

The Analyst

Morgan Stanley analyst Steve Beuchaw downgraded shares of both Henry Schein and Patterson Companies from Equal-Weight to Underweight. The analyst also lowered his price target for Henry Schein to $65 and his target for Patterson to $29.

The Thesis

New evidence suggests Amazon is accessing "critical products" via DENTSPLY SIRONA Inc XRAY and could likely access 3M Co MMM and Danaher Corporation DHR in 2018 or 2019, analyst Beuchaw said in a Wednesday note. (See Beuchaw's track record here.) 

The analyst noted a deterioration in price/mix and volumes in the U.S. and Europe due to customer consolidation, alternative channels, diminishing sales force productivity and reimbursement. The economics of dental consumables distribution, accounting for about 40 percent of Henry Schein's EBIT and 60 percent of Patterson Companies' EBIT, are under growing pressure, Beuchaw said. 

Morgan Stanley lowered its 2020 free cash flow forecast for both companies by 1-3 percent, implying 5-7 percent free cash flow growth compared to its coverage average of over 15 percent.

Morgan Stanley sees multiple compression over the next one to two years, as earnings per share growth slows from 10 percent to 5 percent.

The Price Action

Henry Schein shares are down 6.27 percent year-to-date compared to a steeper 11.5-percent drop by Patterson Companies.

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