Envista Holdings Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Envista Holdings Corporation is a global manufacturer and supplier of dental products and technologies, operating primarily through its Specialty Products & Technologies and Equipment & Consumables segments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Envista Holdings Corporation (NVST), formerly part of Danaher, is a global dental company that provides a comprehensive range of products from consumables to equipment and software, focusing on the dental workflow. Its products are used by dental professionals to improve their workflows and provide better solutions for patients.

Business Overview:

  • Revenue Distribution: NVST operates through two primary segments:
    • Specialty Products & Technologies (S&T): This segment offers a wide range of dental consumables and specialty products such as implant, orthodontic, and restorative solutions. These products are used in nearly all aspects of the dental workflow. These are typically higher margin products and typically exhibit high recurring revenues.
    • Equipment & Consumables (E&C): This segment primarily focuses on dental equipment, including imaging, treatment units, and endodontic devices.
  • Geographical Diversification: Although the company is incorporated in Delaware, the business operations are conducted globally, with significant revenues from both North America and international markets. The largest markets are North America, Europe, Asia, and other developed regions.
  • Industry Trends: The dental industry is characterized by innovation, especially in digital dentistry and orthodontics. The industry is consolidating into larger players, with an increasing emphasis on implantology and esthetics. Growth is expected in emerging economies due to increasing awareness of oral health and growing middle classes. Consolidation has become a trend within the industry.
  • Margins: The specialty products and technologies segment has generally higher profit margins than the equipment and consumables segment. This differentiation drives the overall performance of the business. Both the margin profiles and gross margins are usually in the 50s-60s percentage area.
  • Competitive Landscape: The dental market is quite competitive with significant players in each segment, including other large manufacturers and distributors, as well as niche product companies specializing in certain segments. The strength of larger companies may give them an advantage in pricing because of increased efficiency, better manufacturing practices or other similar strategic approaches, but the nature of niche segments allows smaller players to compete. The competition exists across many different areas, including product portfolio, quality of product, distribution channels and other factors.
  • What Makes NVST Different? NVST’s competitive advantage lies in its balanced approach across its segments. They operate across the entire dental workflow, enabling it to benefit from secular trends in dentistry and to cross-sell and benefit from product synergies. In addition, it has a number of products that are patent protected and differentiated from competitors as well as a recurring revenue and consumables basis that allows more consistent revenue generation.

  • Financials: Let’s dive deep into the financials:

    • Revenue: NVST’s revenue has shown a pattern of moderate growth, with organic growth complemented by acquisitions.
    • Margins: Gross margins are in the 50-60% range, though adjusted operating margins are in the 14-17% area. Gross margin is usually about 2x more than operating margin and varies a lot more than operating margins. The operating margin is significantly impacted by the various operating expenses like sales, research and development, management etc. It is not stable, as it has moved around the low 10% to high 20% area for the past five years.
    • Cash Flow: The free cash flow is slightly higher than the net income of the company and tends to grow at the same rate as the revenues for the company.
    • Capital Structure: Debt is at moderate levels, though it has increased in recent periods with the acquisition of other businesses. The debt to equity ratio of NVST is roughly 0.4 to 0.5.
    • Profitability: Over the past 5 years, ROIC has ranged from 5% to 15%, with a median around 11-12%. With the business being a diversified player in the space, we would expect margins to hover around this region. Although this is impressive, it may show that not all their business is performing extremely well.
    • Growth: The company is attempting to accelerate growth in specific regions of the world and through acquisitions and organic R&D. However, that growth seems to be very volatile and uneven. For example, revenues in FY2022 were 5.2% lower than the previous year, and in the previous year they grew more than 20%.

Moat Rating: 3 / 5

  • Justification: NVST possesses a narrow moat primarily derived from:
    • Product Differentiation & Intangibles: Its strong brands in implants and orthodontics create some customer loyalty, allowing some level of premium pricing.
    • Switching Costs: As most of the products are interlinked and related to the overall dental workflows, customers may have a harder time switching between providers due to the need to learn new software or systems.
    • Global Distribution Network: NVST’s wide distribution network provides an advantage against smaller players, but it is not insurmountable.
  • Notes on Moat: The moat isn’t extremely wide as competition is fierce in the sector. Companies like Align Technologies, Straumann, Dentsply Sirona and many others have similar attributes to NVST, but are also bigger. NVST also sells in large and mature markets where growth is modest.

Risks and Resilience:

  • Legitimate Risks:
    • Competition: Intense competition from both established and new players could pressure prices and reduce margins. In addition, high competition may mean that the company struggles to expand its reach into emerging or newer markets. This can lead to lower returns on invested capital.
    • Innovation: The dental market is constantly evolving, with fast paced technological changes that could make NVST’s products obsolete. This would mean a loss in profits and market shares.
    • Economic Sensitivity: A downturn in the economy could affect discretionary spending on dental treatments, affecting NVST’s sales.
    • Acquisition Risk: Integrating acquisitions is difficult, and may lead to failure if not managed properly. Acquisitions also require the outlay of capital and therefore can hurt the balance sheet.
    • Regulatory Hurdles: Changes in regulations relating to dental products and their sales may create additional costs for the business.
    • Currency Risks: Due to the global operations of the business, fluctuating exchange rates may have an impact on reported earnings.
  • Resilience:
    • Recurring Revenues: Due to its consumable-based segment, the business generates more predictable revenues that may make it more resilient to economic downturns and reduce risk, and will be able to take up new market trends as they are developed.
    • Diversification: Its balanced product offerings and diversification of operations across the entire dental workflow, which is also further diversified across geographical regions.

Understandability: 3 / 5

  • Justification: NVST’s business model is moderately complex:
    • Moderate Difficulty Understanding Products: Although the core business is easy to understand, a dental equipment and supplies company, their operations are complex due to the nature of its distribution channels, and varying product characteristics.
    • Impact of Intangibles: Understanding the impact of goodwill and other intangibles on financials may be harder to understand for many investors.
    • Geographic Reach: The global reach makes the company more complex to analyze as various regulations, cultures, economies etc. come into play.

Balance Sheet Health: 4 / 5

  • Justification: NVST’s balance sheet is considered generally healthy:
    • Moderate Leverage: The debt is at a moderate level, giving ample headroom to take up more debt to fuel strategic decisions or investment.
    • High Current Ratios: The current ratio is higher than 1.5 for the past 5 years, indicating more assets than liabilities in the near future.
    • Good Cash Position: The company also has a large cash pile. That coupled with decent free cash generation gives financial strength to the business.
    • Consistent Positive Equity: The equity is also in a good position with an upward trend over the past 5 years.

Recent Concerns/Controversies:

  • The earnings call of October 2024 indicates that the business is facing headwinds from inflation and slowing discretionary spending from the consumers. This impacts both revenues and margins. It was also mentioned that margins are being negatively impacted by increased spending in research and development activities, along with higher freight and logistics costs. The cost of materials is also higher. Management has mentioned that they are looking to offset these headwinds with cost cutting measures.
  • The earnings call of April 2024 also mentions these same points, with the business attempting to reduce their workforce and cut down expenses in order to achieve higher profitability. Management has also stated that they believe they have started to see an upswing in demand in Europe.
  • The latest filings and earnings calls mention that the market cap has increased greatly following improved performance numbers and guidance, but the recent macro-economic headwinds are a cause of concern.
  • Management seems to be focused on streamlining the operations by cutting out costs, and focusing on growth in developing markets.