Unlocking Hidden Value in Healthcare Distribution
Henry Schein: A Sleeping Giant
Henry Schein, a leading global distributor of healthcare products and services, has been underperforming despite its strong market position and differentiated value proposition. With a market cap of $9.36 billion, the company generates approximately $1 billion of free cash flow annually. However, over the past five years, it has failed to deliver value to shareholders, with a total shareholder return of 0%, compared to 59% for the S&P 500 healthcare index and 105% for proxy peers.
The Root of the Problem: Cost Control
The main culprit behind Henry Schein’s underperformance is its lack of cost control. Since 2019, the company has grown revenue at a 5% compound annual growth rate and gross profit at a 6% CAGR. However, it has spent all that extra revenue and then some on operating expenses, resulting in 8% annual operating expense growth and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins falling to 8% from 10%.
A Comprehensive Cost Restructuring Plan
To turn things around, Henry Schein needs to execute a comprehensive cost restructuring plan of more than the $100 million the company has announced. There is a potential $300 million of actionable savings that could increase earnings per share by 35% or more.
Capital Allocation and Share Repurchases
The company also needs to do a better job with capital allocation. It must stop using cash flow to make acquisitions or pay back its debt that has a 6% cost and start using it to buy back stock at these prices. Henry Schein trades at a 13-times the next 12 months price-earnings multiple — near a 15-year low point. With its stable cash flow and strong balance sheet, the company could increase net leverage to 3.0-times from 2.6-times to acquire more than 10% of its float today and 40% of its float through 2026.
Strategic Opportunities: Medical Business
Henry Schein’s medical business presents a strategic opportunity. While the company has successfully carved into the office-based physician niche as the No. 2 player, the business environment is far more competitive and will favor larger distributors. This asset could be worth $2.5 billion or more in a sale, which would be share price accretive and could be used to further repurchase the company’s discounted shares.
The Need for Activism
Henry Schein is a great company that has gotten sleepy and been allowed to coast when it could have been soaring. The company would greatly benefit from an activist who could help optimize its operations and balance sheet. Ananym Capital Management, a New York-based activist investment firm, has launched a push for change, urging Henry Schein to refresh its board, cut costs, address succession planning, and consider selling its medical distribution business.
A New Era of Accountability
With the right guidance, Henry Schein can unlock its hidden value and deliver significant returns to shareholders. The company needs a refreshed board with best-in-class distribution expertise and a new succession plan for Stanley Bergman, who has been CEO for 35 years. By working together, Ananym Capital Management and Henry Schein can create a brighter future for the company and its investors.
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