Maintain Outperform ratings on HSIC/XRAY/ALGN, Neutral ratings on SIRO/PDCO. July domestic dental survey suggests still-sluggish equipment demand but modestly improving consumables trends, with demand across several categories (implants, orthodontics, established patients visits) reaching multi-survey/multi-year highs. While valuations have moved well above five-year averages for most of our covered dental stocks, we believe improving end markets and easier upcoming comps warrant these moves, with HSIC and ALGN best positioned, in our view, to benefit from improving dental end markets.• July dental survey fielded July 5-10 (n=213 dentists/dental practitioners). From high level, survey suggests dental trends improved late 2Q and thus far in 3Q relative to 1Q.RELATED |New products, faster growth in the orthodontics market• Additional dental market takeaways:
• Patient volumes continue to improve modestly, with trailing three- to six-month volumes improved 70bp sequentially vs. last month's survey (to -0.7% vs. -1.4% last month) and to the second best level we've seen since our spring 2012 survey.RELATED | June 2013 update: What dentists told Wall Street about their businesses• Demand for both low- and high-acuity treatments also improving, with visits from established patients, appointment booking lead times, demand for higher-end restorative work, and demand for orthodontics and dental implants reaching multi-survey highs, at or above prior highs seen in our past 15 surveys spanning the past three years.• Dental equipment findings remain cautious, though, with respondents expecting to spend 2.5% less on average for dental equipment over the next 12 months vs. the trailing twelve months, including 2.2% less on basic equipment and 2.6% less on high-tech equipment. With consumables demand a leading indicator for equipment demand, however, we believe currently improving consumables trends could translate to improved equipment demand later this year/early next.• Still no notable inflection (short- or longer-term) being seen for in-office CAD/CAM. While we fully expect CEREC to remain the in-office CAD/CAM market leader, interest in competitive systems, especially over next three to five years, looks likely to grow.• No model changes across our dental stocks but we are raising price targets for HSIC ($110 vs. $101 previously; 19x NTM EPS), PDCO ($41 vs. $39 previously; 17x NTM EPS), and ALGN ($49 vs. $45 previously; 5.4x EV/NTM sales) given our improving survey results, easing 2H dental industry comps, and generally improving macro factors that tend to drive dental utilization (jobs, consumer sentiment). For company-specific/product mix reasons, we're making no change to our $46 price target on XRAY (European dental implant exposure) or our $73 price target on SIRO (CEREC-related margin/FY'14 EPS uncertainty).• To see all 15 pages of this survey, click on the chart below.
• Patient volumes continue to improve modestly, with trailing three- to six-month volumes improved 70bp sequentially vs. last month's survey (to -0.7% vs. -1.4% last month) and to the second best level we've seen since our spring 2012 survey.RELATED | June 2013 update: What dentists told Wall Street about their businesses• Demand for both low- and high-acuity treatments also improving, with visits from established patients, appointment booking lead times, demand for higher-end restorative work, and demand for orthodontics and dental implants reaching multi-survey highs, at or above prior highs seen in our past 15 surveys spanning the past three years.• Dental equipment findings remain cautious, though, with respondents expecting to spend 2.5% less on average for dental equipment over the next 12 months vs. the trailing twelve months, including 2.2% less on basic equipment and 2.6% less on high-tech equipment. With consumables demand a leading indicator for equipment demand, however, we believe currently improving consumables trends could translate to improved equipment demand later this year/early next.• Still no notable inflection (short- or longer-term) being seen for in-office CAD/CAM. While we fully expect CEREC to remain the in-office CAD/CAM market leader, interest in competitive systems, especially over next three to five years, looks likely to grow.• No model changes across our dental stocks but we are raising price targets for HSIC ($110 vs. $101 previously; 19x NTM EPS), PDCO ($41 vs. $39 previously; 17x NTM EPS), and ALGN ($49 vs. $45 previously; 5.4x EV/NTM sales) given our improving survey results, easing 2H dental industry comps, and generally improving macro factors that tend to drive dental utilization (jobs, consumer sentiment). For company-specific/product mix reasons, we're making no change to our $46 price target on XRAY (European dental implant exposure) or our $73 price target on SIRO (CEREC-related margin/FY'14 EPS uncertainty).• To see all 15 pages of this survey, click on the chart below.
