3 Reasons to Avoid XRAY and 1 Stock to Buy Instead

Over the past six months, Dentsply Sirona’s shares (currently trading at $14.70) have posted a disappointing 8.4% loss, well below the S&P 500’s 15.5% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Dentsply Sirona, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Dentsply Sirona Will Underperform?

Even though the stock has become cheaper, we're swiping left on Dentsply Sirona for now. Here are three reasons we avoid XRAY and a stock we'd rather own.

1. Declining Constant Currency Revenue, Demand Takes a Hit

Investors interested in Dental Equipment & Technology companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Dentsply Sirona’s control and are not indicative of underlying demand.

Over the last two years, Dentsply Sirona’s constant currency revenue averaged 2.9% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Dentsply Sirona might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Dentsply Sirona’s five-year average ROIC was negative 8.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Dentsply Sirona’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We see the value of companies making people healthier, but in the case of Dentsply Sirona, we’re out. After the recent drawdown, the stock trades at 7.5× forward P/E (or $14.70 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at one of our all-time favorite software stocks.

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