No-Moat Dentsply Sirona Shows Restructuring Progress but Coronavirus May Complicate Implementation

Dentsply Sirona reported solid fourth-quarter and full-year results with organic revenue growth of 8.4% and 5.7%, respectively. Additionally, Dentsply was able to achieve operating margin expansion of approximately 300 basis points because of its streamlined restructuring plan, in which the company made strides by ending several of its imaging partnerships, selling its surgical line, and exiting the 1-800-Dentist business, which provided prescreened new patient leads for dental practices. We think these tangible steps elucidate management’s commitment to executing on its multiyear plan, which should allow it to focus on more-profitable segments and targeted innovation. This being noted, we do not think this cost-cutting strategy is substantial enough for the company to become the clear low-cost provider for dental practices, which continue to consolidate and leverage their group purchasing power through the proliferation of dental service organization. Accordingly, we are affirming our long-term view that Dentsply does not possess a sustainable competitive advantage to support a moat because of its focus on commoditylike consumables and relatively undifferentiated technology offerings and, accordingly, we are maintaining our fair value estimate of $40 per share.