Sirona is an Attractive Healthcare Growth Stock

Sirona CAD/CAM Systems Give Single Visit Restorations

Sirona Dental Systems $SIRO is a dental healthcare stock which is exposed to favourable demographic tailwinds and the expansion of the rollout of its global leading technology. Sirona gave results recently and they were very well received by the market. However, the evaluation and prospects look compelling and, it looks like there is more to run. Analysts will be keen to upgrade estimates in their equity research reports


Growth Drivers for Sirona

Sirona looks set to benefit from an ageing demographic, because as people get older they require more teeth maintenance. Furthermore, the trend is towards people having more teeth as they are older, which means more restoration work and ultimately more demand for Sirona's products.

Whilst the demographic argument is well worn in healthcare plays, it should carry more weight with Sirona because of a relative lack of insurance reimbursement issues with dentistry products and solutions. Indeed, the industry is shifting towards private from public pay and much of what Sirona does is aimed at the high end market.

The company is very well run and a global technology leader. Sirona spends around six to seven percent on research and development every year and is investing $15m in setting up a major new innovation centre in Bensheim, Germany. The balance sheet is solid, having seen the company engage in deleveraging the business over the last few years. Sirona is now in a position to make some acquisitions and I would expect some activity on this front.


Sirona Business Divisions CAD/CAM

A graphical breakdown of Sirona's business divisions for Q1

Q1 2011	Revenue	% total Rev	GP	% total GP	GP Margin
CAD/CAM	83.4	35.4%	59	42.2%	70.7%
Imaging	76.3	32.4%	46.1	33.0%	60.4%
Treatment Centres	49.8	21.1%	22	15.7%	44.2%
Instruments	26.1	11.1%	12.7	9.1%	48.7%
Total	235.6		139.8

Source: Company Accounts, Earnings View

...and then looking at how margins and revenues have moved...

% constant currency	Rev Growth	GP growth	GP Margin growth (bp)
CAD/CAM	18.5	18	180
Imaging	11.2	6.5	-50
Treatment Centres	23	20.1	290
Instruments	8.4	3.2	150

Source: Company Accounts, Earnings View

Sirona is best known for its CAD/CAM system Cerec, which allows dentists to make a tooth restoration in a single client visit in 95% of cases. This is advantageous for the patient because he gets an immediate treatment as opposed to a seven to ten day wait, which involves the restoration being created and then fitted in a second visit. Among Sirona's distributers are companies like Patterson and Henry Schein, who have helped establish the Cerec system into low double digit penetration in developed markets. Although impressive, it does suggest that there is plenty of room for growth. It is a proprietary system which is backed up by patents and Sirona's research leadership.

Clearly, many dentists will baulk at paying the sticker price of $100-120k for the system but it actually delivers an impressive return on investment. Sirona estimates that with 25 restorations a month, the cost savings of using the Cerec system should pay for itself within one year. Nevertheless, it is not hard to see that penetration has begun with the high end practices. For less active practices, Sirona has Cerec connect which gives dentists in option to tap into the Cerec technology but at a lower initial cost.

Looking at the results for CAD/CAM it is noticeable that International sales (up 23.3% in constant currency) far outpaced US sales (up .9%) and this is seen as being a result of a tougher US comparison. Sirona had record US sales growth in the comparable quarter last year. Margin expansion was good and came as a result of natural leveraging and a favorable shift in the sales mix.


Sirona Imaging Systems

Sirona are also a leader in Imaging Systems and, this division saw strong growth. However, there was some margin compression due to pricing pressure. This will be somewhat alleviated in the second half of the year when/if Sirona gets FDA approval to sell the new Ortho Plus XG 3D product. It may well be that dentists are holding off buying some of Sirona's other products while they wait for this to be approved.

Thinking longer term, Sirona has 40-45% penetration in this market place. Although, this sounds prohibitive to future growth, the 'penetration' refers to at least one sensor in the practice. Therefore, Sirona should have the opportunity to be able to sell more of them into this established base. Sirona intends to sell a few sensors into a given practice after establishing a presence.


Treatment Centres

Sirona saw very impressive growth in constant currency and margins. Sirona's treatment centres are focussed on the high end and have seen a resumption to growth as the economy recovers. Demand growth was stronger in Asia and Europe (Sirona has very strong in Germany) and I would expect this to continue as teeth surgery for cosmetic reasons is something that the wealthy can afford.


Sirona Stock Evaluation

Tabulating previous results for Sirona and some estimates assuming the current share price of $49.86 and a market cap of $2.76bn with an Enterprise Value of 2.86bn....

(m)	2008	2009	2010	Trail to Q1	2011E
Rev	757	713	770	791	850
Gross Profit	346	346	399	417	470
margin	45.6%	48.5%	51.8%	52.7%	55.3%
Op Income	64	85	128	141	158
margin	8.4%	11.9%	16.6%	17.8%	18.6%
Net Income	29	53	90	101	124
Change WC	-42	-27	1	-26	-25
Op Cash Flow	95	120	176	158	200
Free Cash Flow	59	99	152	130	150
% revenue	7.7%	13.9%	19.7%	16.4%	17.6%
FCF/EV	2.0%	3.4%	5.2%	4.5%	5.2%

Source: Company Accounts, Earnings View

...demonstrates that Sirona does a very good job of converting income into cash flow and debt has fallen dramatically over the years. However, it is noticeable that working capital requirements (accounts receivables in particular) have risen to accommodate the growth in the quarter.

The full year results to Sep 2011 are expected to be front end loaded, but Sirona raised full year guidance to revenue growth of 9-10% (previously 7-9%) and operating income (excluding amortisation of $54m) of $208-216m which represents over 23% growth in operating income.

Current consensus EPS figures are for $2.88 to Sep 2011 but I think Sirona will report closer to $3.05 and I also think that the estimated free cash flow figure (above) is a bit light because they are spending $15m on a new innovation centre. The usual capex run rate is 3-4% so assuming 4% (34m) gives adj FCF=$166m. Assuming a 'fair' evaluation is a forward FCF/EV, of around 5% I think Sirona is better priced at closer to $58.

I bought some.

Core Labs Gives Gushing Numbers

Core Labs Earnings Review

The best way to play a rising oil price is to buy an oil service company, and Core Labs is one of the best ways to get exposure. Oil services stocks tend to be highly correlated with spot oil prices, because their end demand is guided by it. By way of comparison, exploration and production companies tend to be less correlated because their value tends to lie in their reserves, which are only released over time.

What makes Core Labs an attractive stock to buy is that they are focused on using technology to help oil producers define and maximize production from existing oil fields. Therefore, as oil prices go higher, Core Labs will see its services in greater demand. In addition, oil exploration is taking place in increasingly difficult environments (deep water, off shore etc) which encourages utilization of technology in order to be able to better define reserves.

Core Labs Results

Turning to Core Labs results and guidance

• Q4 Adjusted EPS of 84c vs. 81c estimates
• Q4 Revenues of $208.2m vs. $206.3m estimates

Guidance

• Q1 EPS of 82-84c vs. 82c estimates
• Q1 Revenues of $205-210m vs. $211.1m estimates
• Full Year EPS of $3.55-3.60 vs. $3.58 estimates
• Full Year Revenues of $890-910m vs. $893.2m estimates

So, Core Labs beat estimates and revenues for the quarter and, the mid point of full year revenue guidance is above estimates. Full year EPS guidance is within the range of analyst forecasts but Core Labs does tend to be conservative with guidance

Core Labs Growth Drivers

The really good news in this statement is that the biggest single division, Reservoir Description with 53.5% of revenues, is likely to see a strong return to growth. With high oil prices new large scale international deepwater projects are being developed alongside the worldwide shale reservoir projects. In addition, I believe that Core Labs is very active in Iraq and with the formulation of a new Government and the Kurdistan Regional Government planning to recommence exports, there is upside potential here.

Production Enhancement contributes 39.5% of revenues. The division has reported very strong revenue growth (41%) and margin expansion (300bp) which is quite impressive considering that it is strongly focused on North America. Core Labs are assuming a flat rig count for North America, although this is not necessarily a bad thing. Many rigs look likely to shift towards oil from gas as there is a wide historical discrepancy between oil/gas prices. Furthermore, Core Labs activity is in production enhancement so the company can generate strong growth even without a major pick up in exploration activity. The price of oil is more of a driver here.

Reservoir Management is the smallest of the division with only 7% of revenues and 8.7% of operating incomes. It is small, but has the potential for strong growth due to the growth of shale oil and gas projects. Unconventional types of oil and gas projects require greater understanding of reservoir optimization because of the unusual nature of their structural formulation.

Core Labs Stock Evaluation

Core Labs is a likeable stock but its hard to argue that it is anything other than fairly priced at the moment. This is not to say that it won’t go higher. If oil prices go north of $100 than Core Labs stock price will be easily north of a $100 too. However, investing is about risk and reward. Investors should buy stock when the odds are in their favor (value investing) and/or to manifest a strong viewpoint (growth investing) about the stocks growth drivers. Taking a view and assuming that oil prices will go higher this year is fine, but it doesn’t obviate the need to manage the risk of a slowdown in emerging markets.

In the statement Core Labs thinks that it will spend around the same amount in 2011 on capital expenditures. Interpolating the estimates for net income, and historical operating cash flow conversion will get to free cash flow generation of around$175m for 2011. This puts Core Labs on a forward FCF/EV of 4.2% and a forward PE of 25.5x assuming the current share price of $91.3 and that the company hits estimates. Core Labs looks to be fairly valued, although if oil prices rise, it is a great oil services stock to buy.

Givaudan Warns of Rising Raw Material Costs

Rising raw material costs are threatening to trim margins at flavours and fragrances companies.Industry leader Givaudan gave results to day and they confirmed the strong performance of this industry.

The stocks and sector are attractive to buy because they offer a combination of good cyclical growth (perfumes and other discretionary spending products) and secular growth trends. The latter being  exposure to emerging market growth and trends in personal healthcare (scents in creams etc) products. Moreover, the downside is limited by the secular trends within the food sector, which is relatively recession resistant.

The leading global players in this industry are Givaudan, Firmenich, International Flavors & Fragrances and Symrise.  My preferred play in the sector would by Symrise of Germany, which has relatively high exposure to emerging markets and is strongly positioned in the consumer health care market. However, I think today's statement by Givaudan is sufficient reason to hold off buying the stocks just yet.

In a post results interview Givaudan CEO Gilles Andrier talked of very high levels of raw material prices in the last few months. He also discussed high single digit to low double digit growth in raw material costs. All of which is hardly surprising, nor is it unexpected that Givaudan will seek to pass on these price increases. The CEO talked of conditions being similar to 2008 but, in reality, they are not.

Raw materials price rises may well be rising again, but this time around there isn't a major recession coming in terms of end demand. In other words, the flavours and fragrances companies should be able to pass on the rising input costs.

However, the price action today doesn't lie. It will take a while for the price increases to take effect and I think these companies will come under sporadic pressure as they all will all need to inform the market of the short term margin pressures. There will be a time to buy them, but it isn't just yet.

Veeco LEDS market down with guidance

LED Street Light

LED equipment manufacturer Veeco reported record results but disappointed with guidance. The stock is down in the after market. I previously featured LED manufacturer stock Cree in a previous article which you can find via this link

Turning to what Veeco said in these results...

“Q1 2011 revenues will be lower than Q4 2010 because we are planning to ship 12-20 MOCVD reactors in the new MaxBright “cluster” format, and will not be recording any revenue on these systems in the first quarter. Timing of revenue is also being impacted by the longer order-to-revenue cycle times associated with the high percentage of business currently coming from China, primarily due to customer facility readiness. The average time to convert orders to revenue is currently several months longer in China than in other regions.”

...and this means that Veeco's end customers in China have started to slow spending. Since Korea and Taiwan have already slowed spending growth than this is an unwanted-if not unexpected-development.

It is not unexpected because Cree and SemiLEDS had previously made noises about a pause in China street light demand and an inventory work down with their LED bulb customers.


Conclusions for Veeco, SemiLEDS and Cree?

Veeco is higher up the supply chain, so it usually takes a while to feed through. However, Veeco are seeing the slowdown relatively early on. This suggests that there is an issue of over capacity in the industry. This capacity will only be utilised if/when China restarts spending on street lighting. Furthermore, any subsidy cut will hurt the industry on the whole. I'm also somewhat concerned by the possibility for European austerity measures to reduce growth.

Despite the fall from $63 to $52 Cree stock is hardly cheap on a forward PE (June 2011) of 22x and investors will want to wait to see when/if the Chinese resume spending on LED street lighting. I would look to SemiLEDS next results before taking a definitive view.

In the last results SemiLEDS made specific mention of pricing pressures and this is widely believed to have come from Cree. This sort of activity is usually a sign of over capacity and does not auger well for Veeco or indeed for Cree and SemiLEDS. All three stock prices have been weak. Furthermore, gross margins for all three of them could come under pressure, unless end demand picks up. No need to rush in just yet.

Anixter Distributes Growth

Anixter Ohm Sweet Ohm

Anixter is a world leading component distributor and a good play on global growth in manufacturing. The recent results were excellent and the stock has many positive drivers. It is a good stock to research. Rising commodity cost pressures are always a concern but, as a distributor, they should be able to pass raw material costs on.

Before talking about the company in more detail, I want to make some remarks on the recent results.

Anixter Q4 Results

According to Anixter, the global manufacturing outlook appears to be accelerating. For example Anixter sales are normally down 3% sequentially from Q3 to Q4. However, this year there was a sales increase. Most notably, it is North America and Europe that is normally weak in this period, but this year Anixter saw increases. Emerging markets were strong, in line with what everybody else is reporting in the sector.

The results weren't entirely positive for Anixter as they suffered a $17.3m unfavourable movement from discontinuation of a key Alcatel-Lucent account. On the other hand, Anixter benefitted from $19m in favourable copper pricing. In addition, Anixter have made good progress in managing working capital requirements as revenues have picked up. Ultimately, this will help cash flow generation in future.

From the conference call...

'we had some very strong focus on working capital management with $500 million roughly increase in revenue if you look at our historical measures where it takes about $0.25 of working capital per revenue dollar, that would have implied a working capital investment for the year of somewhere in the range of $125 million. But I think the actual number was somewhere in the $30 million, $40 million range. So we feel that we did a pretty good job on getting some enhanced inventory turns in certain parts of the business, getting better receivable collection in parts of the business. We certainly are going to continue that focus as we go into 2011. I'm not sure we can expect to get quite that much leverage other than that'

...in other words, they have demonstrated that the increased revenues are creating accelerated cash flow generation. This is a critical point for distributors as they can easily find growth being financed by having to increase inventories disproportionately. 


Anixter End Markets

Anixter has three main divisions and various industry verticals within these divisions. I'll briefly run through them in turn.

Enterprise cabling and security, representing 54.1% of revenues. Anixter is seeing good growth in IT infrastructure spending. In particular, Anixter is exposed to security and video surveillance spending, IP video networking and data centre spending. All of which look set for good growth in 2011.

Wire and Cable, representing 31.8% of revenues. This division looks set for strong growth in 2011. It is heavily exposed to late cycle major engineering projects. In particular with industrial, mining and energy projects. Quoting from the conference call..

'Mining projects in South America and Canada are going gangbusters. There are new mines opening in China, in Northern China. There are a lot of gas projects in Australia and Indonesia right now. There are gas and oil projects in the Middle East. There's a lot of development continuing there and power gen, there's projects in the U.S., Europe, North Africa, South America and Asia. So fairly broad I guess I'd say in the Emerging Markets, the places where you typically think of resource base and oil and gas kind of projects.'

....and this division looks set to provide Anixter with the strongest growth prospects for 2011.

OEM Supply, representing 14.1% of revenues. This division is the earliest in the cycle for Anixter and should see tougher comparables going forward as a result of recovering first. Furthermore, Anixter management were keen to note that they key aerospace industry vertical is likely to be flat for 2011. The relative weakness of aerospace supply is that Anixter's customers (Boeing and suppliers etc) still have inventory to workdown. Furthermore, Boeing 787 delays are holding back sales and Anixter is not a major supplier to Airbus.

Anixter Stock Evaluation

Anixter analyst forecasts are for EPS of $5.03 and $5.75 for 2011 and 2012 respectively. With a current share price if $68.5, this puts Anixter stock on forward PE ratios of 13.6x and 11.9x respectively. This is attractive for a company set to grow earnings in the teens. However, I always think that distributors should command an evaluation discount because of the gearing towards risk. A lot of good growth has been priced in and, any slowdown in the global economy could leave them with unwanted inventory and falling margins.

That said, growth prospects look good for 2011 and I think Anixter stock is better priced at closer to $77 or 15x 2011 forecasts. I will look for a dip here before buying, as a 12% return is probably not enough for me and the stock price has risen strongly recently. I don't like buying stocks too far from the 50 day moving average.

Virbac Offers Secular and Cyclical Growth

Virbac Looking After Animal Health

Virbac is a very interesting animal health pharmaceutical company and a good stock to research. It offers a good balance of secular growth from companion animals (pets) and exposure to the positive long term trends of food producing animals. I think is a good stock to buy and picked some up recently. It is a good stock to hold within an agribusiness focused portfolio.

For potential investors, Virbac's companion animal segment growth should be seen as trending with general increases in pet populations and, with company specific issues like new product releases and market share grab. Alternatively, the food producing animal segment is more cyclical and exposed to the increasing usage of parasiticides, antibiotics and vaccines in animals. I think this is a good long term trend as protein consumption is on the increase and utilisation of animal pharmaceuticals will help to deal with increasingly concentrated production techniques.


Virbac Revenue Breakdown

Here is a table of percentage of revenue share by geography and segment to the half year of 2010

%	Rev Share	Growth
Europe Companion	34.6	20
Europe Food	15.8	0
N America Companion	14.1	25
RoW Companion	11.1	27
RoW Food	21.7	66

Source: Virbac

Clearly there is a slowdown in European Food market and high feed prices have not helped. However, the good news is that this segment only makes up nearly 16% of revenues and the rest of the world is doing fine. Moreover, there is a clear split between how bovine products (77% of food revenues) are performing and how swine & poultry are currently faring.

The companion market is doing very well with new product launches and a return to economic growth.



Virbac Food Producing Animal Markets

For 2010 Virbac reported 5% organic growth in this segment. As discussed above, emerging markets are doing much better than Virbac's core market of Europe and in particular France. These markets can be seen as cyclical and dependent upon the dynamics of production/price factors in these markets. What is common to all of them (swine, poultry and bovine) is that they are experiencing rising feed costs.

When feed costs rise, supplier's margins get squeezed unless they have pricing power through relatively low production. Ultimately, the price increases tend to cause production expansion. It is a classic commodity price cycle. Here is where we are now with swine...

...and with bovine...

...so it looks like, after a very difficult period from summer 2008 to Jan 2010, prices are very strong. Although feed costs are high, as long as prices are high, margins and profitability can expand. This will encourage future production. There is an unfavourable supply/demand balance in poultry but only makes up a small portion of Virbac's overall sales.

Unless a global economic slowdown ensues, I would expect production expansions in bovine and swine and this has to be good news for Virbac's sales of parasiticides and antibiotics.

Tyson foods recently gave a very upbeat outlook for 2011.


Virbac Companion Animal Market

This segment makes up 60% of sales and revenues in 2010 were up 13.5% organically. I've broken down sales in this segment by product here

%	Rev Share
Parasiticides	30.8
Vaccines	14.6
Antibiotics/Dermatology	14.9
Specialities	12.6
Horses	7.9
Petfood	6.6
Others	12.6

Source: Virbac

Of particular note was the success of Fiproline and Effipro (Europe)which are spot-on and spray products that treat flea and tick infestation in cats and dogs. They were launched in July 2009 and have already grabbed good market share. Virbac has a sales target of E15-20m and sales were estimated at the top end of this forecast. Virbac intends to launch Effipro in the US by the end of 2011.

Of the existing products in the US, sales of Iverhart (heartworms) have been expanding rapidly. Going forward Virbac plans to launch Canileish (canine leishmaniasis vaccine) by the end of 2011 with a European sales target of E25-30m.


Virbac Forecasts

With the new product launches in the companion sector plus a cyclical pick up in the food sector, I think Virbac is capable of hitting analyst estimates and possibly exceeding them. Here is a summary of consensus forecasts

(m's)	2007	2008	2009	2010E	2011E	2012E
Revenue	438.6	443.4	467.4	572.5	612.3	659.4
growth %	9.2	1.1	5.4	22.5	7.0	7.7
EPS (c)	360	411	448	650	707	791
growth %	23.7	14.2	9.0	45.1	8.7	11.9

Source: FactSet Research Systems Inc

At a current share price of E111 this puts Virbac on a forward PE of 15.7x and gives a market cap of E965m and an enterprise value of E998m. Free cash flow generation has also been improving with generation of E23.7m and 42.6m for 2008 and 2009 respectively. On a trailing basis it is E57.6m
I think Virbac is attractively priced for its long term growth prospects and the recent dip could be providing a decent buying opportunity with a target of E129 in mind.



Source:
Virbac 2010 Sales release