Envista Stock: Valuation Not Enough For Me To Get Enthusiastic

Late in 2021, I looked at Envista Holdings (NYSE:NVST) as I concluded that the company was not making a dent yet. The company is the former dental operation from Danaher (DHR) which spun-off these operations into Envista in 2019, as high leverage and susceptibility to the pandemic created a tough 2020. With multiples reflecting quite some good news, I found that valuation more than fair late in 2021 already.

Dental Business

Envista is a dental business which generated $2.8 billion in sales at the time of the spin-off from Danaher, with revenues split equally between equipment & consumables, as well as specialty products & technologies. This is a perfectly solid and stable business with geographical coverage seen across the globe, with EBITDA margins seen in the mid double digits.

Specialty products & technologies include implants and orthodontic systems, marketed under Nobel Biocare and Ormco brands, with margins in excess of 20% being the result of strong positioning and direct distribution to end clients. Equipment and consumables are marketed under the KaVo Kerr brand, as a broad range of applications and other distribution models results in lower margins at around 10%.

For both segments, it is the case that long-term demographic trends boost demand for these products and with shares trading at $30 at the time of the spin-off, that valuation was more than fair amidst quite some debt being apparent on the balance sheet, as the company originally guided for 2020 earnings at around $1.68 per share. That projection could be thrown out of the window following the outbreak of the pandemic, as sales fell to $2.3 billion for the year with adjusted earnings falling to $0.98 per share, as GAAP earnings were largely evaporated.

Net debt came in at 900 million, for a 3 times leverage ratio based on the softer performance in 2020, yet as shares rose back to the $30 mark already, valuations rapidly became demanding. 2021 was set to become a year of recovery, as there were some other moving parts as the company reached a deal with a Germany company to sell its KaVo Treatment unit in a $455 million deal, in a transaction which shed $317 million in sales. Investors liked this divestment of the lower margin business, as shares rose to the $40-$50 range for most of 2021. This came as the company was set to earn just below $2 per share in 2021, as net debt was cut to $200 million on a pro forma basis following the KaVo divestment. Pegging earnings power close to $1.80 per share (after some adjustments and the dilution from the KaVo sales) and shares trading at $45, the resulting 25 times multiple was quite demanding in my eyes.

This was certainly the case as Envista acquired Carestream’s Dental intra-oral scanner business in a $600 million deal by year-end, in order to add $60 million in sales, being a steep valuation. In comparison, Envista traded around 3 times sales as leverage would increase in a major way, and no earnings profile was announced.

What Happened So Far This Year?

The $45 stock rose to $50 in March, fell to a low at $35 in June and is now trading hands at $38 per share. In February, Envista posted fourth quarter results with core sales growth for the final quarter closing down to around 6%.

Full year sales recovered to $2.5 billion, still ahead of the 2019 pre-spin off and pre-pandemic results. Adjusted earnings came in at $1.92 per share with GAAP earnings posted at $1.48 per share as I am quite happy with the adjustments, not involving continued and dilutive stock-based compensation expenses. Amidst these results, the company called for 6-8% core growth in 2022.

The KaVo deal closed at the outset of the year and the purchase of Carestream’s Dental Intra-oral business closed by April. In May, Envista announced that it has reached an agreement to acquire Osteogenics, but no sales or purchase price details have been announced, yet it seems as if this is just a smaller transaction.

In May, Envista posted first quarter results with reported sales up 3% to $631 million with core sales up 5%, yet EBITDA and adjusted earnings were down minimally year-over-year. Net debt inched up to $307 million that is while the KaVo deal closed during the quarter, while the $600 million deal for Carestream closed early in the second quarter, for a $900 million pro forma net debt load.

With EBITDA trending around half a billion, this still being very manageable as leverage ratios come in below 2 times EBITDA. With core sales still seen at 6-8%, the company likely posts sales around $2.6 billion as EBITDA margins in excess of 20% confirm an EBITDA number in excess of $520 million. As the EBITDA number came in at $125 million for the quarter, we can easily annualise the quarterly earnings number of $0.47 per share, implying that earnings still trend around $2 per share.

With shares now down from $45 to $38, a 22-23 times earnings multiple has fallen to 19 times here, as little news has taken place since I last looked at the shares late in 2021. Hence, the valuation has become a bit more compelling, but that is no surprise as higher interest rates made interest rate products a bit more attractive versus equity earnings yields, as it simply feels as if Envista is underperforming a bit.

After all, earnings are only flat compared to the time of the 2019 spin-off and sales are actually lagging a bit compared to that period in time, indicating some kind of softness in the operational performance, despite being positioned to activities with growing secular trends.

Hence, I see some improvement in the risk-reward position, but I am not just yet sinking my teeth into the shares of Envista here just yet.