The prospect of getting pushed out of the corporate nest as a public spinoff is apt to send shivers down the spines of executives these days. But the timing couldn’t have been better it seems for Orange-based Sybron Dental Specialties Inc.
Shares of Sybron Dental went out in late November at around 13 and have climbed to as high as 22 after being spun off from the former Sybron International Corp. The stock pulled back slightly in March but was trading around 20 with a market capitalization of about $690 million late last week.
“Most investors love these kinds of businesses,” said Gregory Waller, Sybron Dental’s chief financial officer. “They’ve been burned by these dot-coms and technology stocks that look like they had high growth rates but didn’t generate earnings and cash.”
Sybron Dental’s been “nothing but pleased with the results” of going public, Waller said. “Actually, we quite looked forward to the spin-off, to be honest with you,” he said.
A maker of materials and instruments for dentists, orthodontists and laboratories, Sybron Dental employs about 250 people in Orange County and 3,400 worldwide. Units include Kerr Dental, a maker of restorative dental materials and instruments used in root canal therapy; Ormco, which produces orthodontic supplies like braces, bands, crowns and elastics; and Metrex Research, a maker of infection-control products.
Former parent Sybron International, a maker of general laboratory products, spun off its dental operation to let managers focus on their core operations. Sybron International was renamed Apogent Technologies Inc. and recently moved from Milwaukee to Portsmouth, N.H.
“The lab group, which is now Apogent, and the dental group, which is us, were basically two wholly owned and distinct subsidiaries,two different businesses,” Waller said. “With totally independent management and businesses, the stock market never knew how to conclude what kind of business we were in.”
Apogent’s business mix gradually shifted from dental to general laboratory, Waller said. “So the board just felt maybe our stock would do better if we let these businesses go their own separate ways and design their own capital and incentive structures that would make sense for each one.”
Sybron Dental’s performance reflects healthcare’s emergence as a safe haven for investors wary of the Internet fallout, said Derek Leckow, an analyst with Barrington Research Associates Inc. in Chicago. The company’s predictable revenue stream is another factor, he said.
Investment advisors and managers are becoming wary of businesses that show “tremendous revenue growth but no earnings and no cash generation,” according to Waller.
Sybron Dental received a “market outperformer” rating from Lawrence Keusch, medical device analyst at Goldman, Sachs & Co. in Boston. Sybron Dental’s “strong cash flow generation, leading market positions and highly profitable businesses” should lead to significant debt reduction and drive consistent 10% earnings growth, Keusch wrote in a research note.
Sybron Dental reported earnings before taxes and other items of $26.3 million for the three months ended Dec. 31, which allowed the company to pay off $8 million in spinoff- related debt during the quarter. Sales increased 4% to $97.5 million for the period.
The dental products maker should continue to meet or exceed estimates for the rest of its 2001 fiscal year, Keusch wrote, thanks to falling interest rates and a recovering euro. But he cautioned that might be offset by a slowing economy’s effect on the pace of elective dental procedures.
“Although basic dental procedures have been historically immune to fluctuations in the economy, the recent preponderance of elective dental procedures for aesthetic enhancement may not be as secure,” Keusch wrote.
Keusch projects Sybron to earn $1.13 a share in fiscal 2001 and $1.24 a share in fiscal 2002.
“The company concentrates on dental consumables, which is a stable and growing business,” John Keeley, president and fund manager of Keeley Small Cap Value Fund in Chicago, told Morningstar.com. “International growth is greater than domestic growth as emerging economies increase their use of dental care.”
Sybron Dental already derives 40% of its business offshore.
The company’s stock is selling at 16.8 times earnings, “below the average dental company while providing 15% long-term growth,” Keeley said.
Sybron Dental’s challenge is to hold its own against a big rival, York, Pa.-based Dentsply International Inc., which counted a $1.8 billion market value of as last week.
But analysts noted that Sybron Dental’s operating margins are about 5 to 6 points higher than those of Dentsply, according to Waller. “So that’s one thing they really like,” he said.
Sybron Dental also plans to keep reducing debt, which should increase earnings and cash flow over time, Waller said. As of Dec. 31, the company had about $370 million in total debt. But a secondary stock offering isn’t in Sybron Dental’s immediate plans, he said.
Executives may consider an offering if they feel earnings won’t be diluted, Waller said.
Demographics favor dental companies such as Sybron Dental and its competitors, according to Waller. “People are living longer, retaining their teeth longer,” he said. “And that just bodes well for the dental business.”
Waller addressed how a slowing economy might play into Sybron Dental’s growth and said “recession-proof” was too strong a term.
“I’d say recession-resistant,” he said. “Typically, if the economy slows down, our business slows down and just grows at a little slower pace. In the well-developed countries, people don’t put off dental care to any significant extent.” n
