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Weekly Dental Survey #14 - Pace of Recovery Continues to Surprise

By Jeff D. Johnson, O.D., CFA

Republished. Original Source: Baird Equity Research
June 15, 2020

In our 14th straight weekly dental survey, patient volumes improved again, down 36.6% y/ y vs. -44.6% last week/-57.3% prior week, with improvements seen across every region yet again. We’re encouraged to see in our survey results this week no impact from rising COVID numbers in some states, as well as evidence that dental offices are getting more efficient at turning their operatories and open appointment slots are becoming increasingly filled. Overall, the pace of dental demand recovery in the U.S. continues to surprise to the upside

In our 14th straight weekly dental survey, patient volumes sequentially improved again, down 36.6% y/y vs. -44.6% y/y last week and -57.3% y/y prior week, with 88% of respondents’ dental offices now re-opened to non-essential care.

More granularly, patient volumes sequentially improved across all regions, with Mountain states volumes -9% y/y (-11% prior week), South Atlantic -17% y/y (-32% prior week), and all other regions still down 30-60% y/y but on fairly steep improving line.

We consider this week’s continued volume improvements important for two reasons:

  • First, they suggest rising COVID case numbers in some states aren’t yet impacting dental visits. This is something we remain concerned about (and that likely contributed to last week’s dental stock sell-off), but for now we’re not seeing evidence of a second (or extended first) wave of patient slowdown.
  • Second, with dental visits continuing to improve even in states that have been open for 4-6 weeks, risk that much of the initial rebound in dental volumes was backlog driven seems to be falling. This, too, is something we worry about, but the data seems to be running counter to that concern at this point.

Additional survey positives include:

  • Offices are getting more efficient at turning operatories (11% sequential improvement in per day appointment slots, 21% improvement vs. early May) despite increased cleaning regimens and ongoing patient social distancing efforts.
  • Appointment slots are increasingly full (69% this week vs. 60% last week/mid-50% few weeks ago); further evidence, in our view, that improvements in recent weeks haven’t been all backlog driven.
  • PPE availability improved this week to the highest level we’ve seen yet for gloves/wipes/ hand sanitizer, although mask availability remains constrained.

Things to watch:

  • Equipment purchasing intent settling in at down ~10-15% vs. pre-COVID expectations (four weeks in a row near these levels); not terrible, in our view, and better than feared, but something that will impact at least near/intermediate term.
  • Added PPE costs ~$12/case, 52% of offices expect to absorb (up from 46% prior week), which could drive behavioral changes such as private-label trade-downs, fewer equipment purchases, delayed office remodelings, etc.
  • Consumables purchasing trends moderated sequentially for first time in 5+ weeks; likely reflects some stocking in prior week or two when a number of offices initially reopened, but with this week’s consumables purchases still well above levels from just a few weeks ago, we also don’t see this as evidence of slowing patient demand.

June 11 Dental/COVID-19 Survey Results

Survey Profile

Sample Size: 98 survey participants                    

Method: Survey conducted via online survey tool on June 15

Survey Sample Profile – By Practice Focus/Size:

  • Practice Focus: 92% of respondents consider themselves general dentists and 8% are specialty dentists. In comparison, the ADA estimates roughly 80% of its members are generalists and 20% of its members are specialists, meaning our survey is slightly biased toward general dentists.
  • Practice Size: 52% of our respondents work in a single-doctor practice and 48% work in multi-doctor practices. This is slightly less than what the ADA estimates to be just over 60% of dentists operating as sole practitioners.
  • Practice Type/Ownership: ~83% of respondents work in a practice that has 1-3 offices owned by the dentist(s), with ~8% of respondents working in non-dentist-owned corporate practices. This ~8% of respondents working in corporate-backed settings is pretty much in line with the 8.8% of U.S. dentists affiliated with DSOs in 2017 per recent ADA reports (and what we assume was likely closer to 10% of U.S. dentists by the end of 2019).

Survey Sample Profile – By Geography

  • Geographic Distribution. Of the 98 dentists who responded to our survey, 35% were from the East Coast, 29% were from the West Coast/Mountain region, and 36% were from the Central states. Compared to BLS data, the most significant deviations were in the Middle Atlantic and Pacific regions, which were overrepresented in our survey, and the South Atlantic, which was underrepresented.  

 

Dental Volumes/Sentiment Trends

Q1. How would you characterize patient traffic flow through your office over the past week relative to the same period last year?

Results/Baird Take: On average, respondents to our June 11 survey reported a 36.6% contraction in patient volumes over the past week compared to the same period a year ago. This was another significant improvement from last week’s -44.6% y/y volume finding, and we’ve now seen a 20-point improvement in y/y patient volume trends over just the past two weeks and a 50+ point improvement in y/y patient volumes in just the past five weeks.

In addition to the positives we take-away from just the sheer extent of y/y improvement in patient volumes over just the past several weeks, we are also encouraged that we’re not yet seeing a plateauing of improvements, something we’ve been worried could happen either due to structural hurdles such as longer sanitation times of offices in between patient visits or less capacity for exams we assume most offices will have near/intermediate-term due to these increased cleaning regimens and patient social distancing efforts.

Even when we drill into patient volumes on a regional basis, we don’t see signs of plateauing volume trends, even in the Mountain and South Atlantic regions which seem to be several weeks ahead of other U.S. regions in their path to recovery.  With Mountain and South Atlantic volumes this week improving to -9% y/y and -17% y/y, respectively, vs. 11% and -32% last week, we believe these are volume trends we could potentially expect to see from other regions over the next few weeks, suggesting there is still significant room for further improvement in y/y volume trends at the consolidated U.S. level as well.

Finally, we were also encouraged that patient volumes across every single geographic region improved again this week.  That gives us confidence in our overall U.S. commentary above, but also seems to suggest that, at least so far, rising levels of COVID-19 infections across many of the states that have again been in the news again this past week (GA, FL, TX, AZ, UT, etc.) aren’t currently having a notable impact on dental volumes.  Of course, we believe concern on that front was likely one of the key contributors to the sizable sell-off we saw in dental stocks last week and that’s something we – like other investors – believe remains a real risk to recent dental recovery trends.  For now, though, we’re not seeing any issue on this front and believe this is a risk our region-by-region weekly analysis will help investors better understand over coming weeks.

Q2. On a scale of 1-10, what have you seen in your practice over the last week or two with regard to the following? Please rate with: 1 = significant decrease, 5 = no change, 10 = significant increase.

Results/Baird take: As dental offices across the U.S. continue to open, we again saw broad-based improvements this week across a number of specific items we ask about each week, most notably for new and established patient exams, along with future exam bookings from both groups. We did, however, see our first sequential step down in dental consumables purchasing feedback, including in the Mountain and South Atlantic states that have been opened the longest, as well as in the New England and Mid-Atlantic region.  We aren’t overly surprised to see such sequential declines, as we’ve long assumed offices likely needed to stock up on supplies upon re-opening before settling into more normalized purchasing patterns over time.  Importantly, we don’t believe at this point investors need to worry about these declines being some sort of leading indicator when it comes to softening patient volumes or anything troubling such as that given the improving patient volume trends highlighted above.

Q3. On a scale of 1-10, how would you characterize current availability of the following PPE and/or infection control products? Please rate with: 1 = not available at all and 10 = completely available, no problem obtaining.

Q4. When are you hearing PPE might be more broadly available for purchase? Any other specifics you can provide?

Results/Baird take: PPE availability improved again this week across each item we ask about other than masks, and outside of masks, availability of PPE products has largely continued to improve each week in recent weeks.  These improvements generally fit with what we are hearing anecdotally in the field, although to be clear from both our industry conversations and even some of the commentary above, it is obvious that masks remain in short supply and even for other products, prices remain high and supply is still challenging, even if improved relative to a few weeks ago.

Q5. On a per patient/per appointment basis, roughly how much more are you spending currently vs. prior to the COVID-19 pandemic on personal protective equipment (PPE) and infection control products?

Q6. How do you believe the increased need for, and potentially higher cost of, PPE due to the COVID-19 pandemic will be covered by your practice?

Q7. Which of the following, if any, applies to your office at the present in how you have had to, or will respond, due to the increased PPE or infection control products costs? (Mark all that apply)

Results/Baird Take: We just added this question two weeks ago as we believe there are now enough dentists who are back to work and using enough PPE to have insight into questions we’ve had for many weeks now about how much added PPE requirements will cost the average office and how these added costs might impact practice profitability.  Similar to the first week we asked this question, we found in this week’s survey that dentists, on average, are spending nearly $12 more on PPE and other disinfecting products than they were prior to the COVID-19 pandemic, with 52% of offices simply absorbing these costs (up from 46% of respondents last week), 26% of respondents planning to pass these costs directly on to patients (down from 31% last week), and only 21% of offices hoping to recoup these costs from dental insurance companies.

We’ve already heard anecdotally from a few dentists we speak with that some patients have pushed back on these added PPE charges, which is unfortunate in our view, but also doesn’t really surprise us and could explain why we already saw a fall-off in the percentage of dental offices this week attempting to pass these costs through to the patient (although our small sample size and ~10% margin of error might also explain).  We also remain uncertain as to whether or not insurance companies will even allow dentists to bill patients for added PPE costs if that patient is supposed to be paying a pre-negotiated rate for a certain procedure. This could also be a reason we saw a sequential uptick in the percentage of practices saying they now plan to absorb these added PPE costs themselves.

Finally, we note that as a result of these added PPE costs, 57% of respondents tell us they plan to seek out lowerpriced distributor/supplier partners over time, while 57% of respondents plan to slow their dental equipment purchases, 39% plan to switch to private label and away from more premium branded products, and 35% plan to delay office remodeling projects.  We’ll see where the trend line on these latter points go over the next few weeks, but this potential move to lower-priced alternate dealers is a risk we believe investors will need to monitor for HSIC and PDCO on our list, while the trade-down to generics risk is something that could weigh on NVST and XRAY, and the slower equipment purchase intent could hurt all of our covered dental names, over time.  For now, we believe the good of improving patient volumes highlighted earlier in this survey outweigh the bad of these potential compensating behavioral changes from dentists over time, but we’ll need to monitor this issue nonetheless as we believe it could ultimately limit the extent to which revenues recover across our covered dental names over the next few quarters.

Q8. Which of the following, if any, applies to your office at present? (Mark all that apply)

Results/Baird take: As of Thursday, June 11 when we fielded this survey, only 12% of dental offices across the U.S. were still closed for general dental care, an improvement we could not have imagined even one month ago when 86% of offices remained closed in early May. By region, all respondents who practice in the Mountain and South Atlantic states again said their offices were open this week, while we also saw double digit sequential improvements in the number of Pacific offices open this week (95%) vs. last week (83%) and New England/Middle Atlantic offices open this week (67%) vs. last week (44%), with the Central region the one region where office openings were fairly stagnant with last week, at 86% this week vs. 85% last week.

Q9. If your office is currently closed to all patient care or if closed to all but emergency care, what is your best guess as to when you will re-open your office to elective/non-emergency dental care?

Q10. On a scale of 1-10, what do you believe your overall visibility is when it comes to re-opening your office over the timeline you suggested in the question above? Please rate with: 1 = no visibility whatsoever, not at all confident on timing10 = high visibility

Results/Baird take: For those offices that remained closed as of this week’s survey, the expected time until re-opening increased by nearly a full week, to 3.23 weeks from 2.52 last week. While the increase may seem surprising given how much progress has been made in re-opening dental offices across the U.S. in recent weeks, we remind investors that even though our checks suggest 100% of states now allow dental offices to be open for non-essential care, there can still be county or other local regulations against such opening, or some practitioners may simply not yet feel comfortable re-opening their practices.  As such, we don’t believe investors should over-read this question as being indicative of any type of set-back for the industry.

Q11. On a scale of 1-10, when do you believe you will begin to offer each of the following procedures once you re-open your practice to elective patient care? Please rate with: 1 = Immediately, 5 = Sometime in the next few months but not immediately, 10 = Far down the road

Results/Baird Take: Respondents continued to suggest in this week’s survey they initially expect to provide less invasive procedures at lower risk of fluid aerosolization soon after re-opening their offices, with procedures with higher risk of fluid aerosolization (dental implants, hygiene using power instruments, etc.) expected to be performed further down the road. Interestingly though, even those procedures at highest risk of fluid aerosolization averaged less than 5.0 all five times we’ve asked this question, suggesting dentists will likely be performing even these procedure in the not-too-distant future (we say that because our scale for answers to this question is 1 = immediately and 10 = far down the road), with feedback on these riskier procedures also continuing to improve in recent weeks.

Q12. If you have already resumed or expect to resume general dental care visits over the next couple/few weeks, how many appointment slots are you including on your schedule per day and how does this compare (on a percentage basis) to the number of daily appointment slots you would offer prior to the COVID-19 pandemic?

Q13. If you have already resumed or expect to resume general dental care visits over the next couple/few weeks, of the open appointment slots you are including on your schedule per day, what percent of those slots are actually being filled by real patient demand?

Results/Baird Take: Another factor we are monitoring when it comes to the extent of potential recovery for the broader dental market is the capacity dental offices will have to perform patient exams, as we believe (and have heard from various sources) additional time needed to socially distance patients in a dental office and to disinfect the examination lane in between patient visits could, at least initially, lead to fewer available appointment slots across the industry. With that in mind, we recently started asking how many appointment slots on a per day/per dentist basis respondents expect to make available on their schedule, and how this number of appointment slots compares to a “typical” schedule prior to the COVID-19 pandemic.

To that end, we found in this week’s survey that respondents expect to offer nearly 13 appointment slots per day per dentist, up vs. last week’s 11.6 expected slots and the highest number of appointment slots per dentist per day we’ve seen in asking this question over the past seven weeks.  In this survey, those 12.9 appointment slots per dentist per day represent 65.0% of what respondents tell us would have been a “normal” schedule prior to the global COVID-19 pandemic, with this 65.0% a 6.5-point sequential improvement over what we saw in last week’s 58.5%.

Finally, we also asked again this week what percentage of these slots is actually being filled by real patient demand, as we also believe that just because a dental office might offer a certain number of appointment slots each day, patient demand might not be strong enough to fill those openings, at least initially. What we found this week is that dentists are seeing 68.8% of appointment slots that are available at the dental office actually getting booked by patients, another sequential improvement vs. last week’s 60.0%, and well above the 56%-60% we saw in the prior five weeks asking this question.

We believe all of the updates to this question are encouraging this week, as dental offices begin to offer more appointment slots per dentist per day, potentially reflecting growing efficiencies when it comes to cleaning the operatory between patients and with patient social distancing efforts being enacted at practices.  We’re also encouraged to see that demand for these patient slots is increasing, another sign that the early rebound in demand and patient volumes we saw a few weeks ago isn’t yet tapering off, something we’ve been worried could happen after several weeks if the early rebound was being driven more by patient backlogs than normalizing demand trends.

Q14. Considering both the current state of your business (patient volumes and practice revenues) and your expectations for the next 3-6 months (again, focusing on both patient volumes and practice revenues), please rate your sentiment for each. Please rate with 1 = awful, 10 = great, never been better.

Results/Baird Take:  Sentiment regarding the current environment and regarding dentists’ next 3-6 month outlook for their practices has been ticking higher in recent weeks, and that was no exception this week for the current environment, while the 3-6 month outlook held flat. Specifically, sentiment was rated at 4.53 from a current environment perspective in this survey vs. 4.13 and 3.33 over our prior two surveys and was 5.86 from a 3-6 month outlook perspective vs. 5.88 and 5.46 over our prior two surveys. As we’ve said in recent surveys, we believe the higher rating we continue to see in sentiment for future vs. current business trends is encouraging as we believe it means dentists still expect the state of their business to rebound off current levels to some level of “better” 3-6 months from now, while the fairly steep sentiment improvements we’ve seen in recent weeks regarding respondents’ “current environment” likely reflects the steady progress we’re seeing as more offices move toward re-opening.

We’ve also been encouraged over the last few weeks that 3-6 month expectations from respondents have rebounded to levels above the average of our past 20 surveys dating back to June 2018 and above the 5.23 confidence level survey respondents told us they had in their 3-6 month outlook in our March 12 survey, which we consider to be the last survey we performed before COVID-19 pressures became wide-spread and well known in the U.S.  Dentists’ feeling similar to even a bit better about their 3-6 month outlook today than a couple months ago prior to the nationwide shutdown of dental care is something we would not have expected as recently as several weeks ago and we believe this type of improvement in future outlook for dentists provides reason to believe things like dental equipment demand may not be as depressed later this year and into 2021 as we might have thought just a month or so ago.

Dental Equipment Spending Outlook

Q15. On a scale of 1-10 and given recent patient volume and practice revenue trends, what best describes your expectations for dental equipment spending over the next 6-12 months? Relative to the past 6-12 months, I expect equipment spending to be...

Q16. Regarding dental equipment, how much did you spend over the past 12 months and how much do you expect to spend over the next 12 months on dental equipment purchases?

Results/Baird Take: Question No. 15 above asks qualitatively about dental equipment spending plans over the next 6-12 months (“on a scale of 1-10, will you be spending more or less over the coming year”), while Question No. 16 is more quantitative in nature (“how much did you spend over the past year and how much do you plan on spending over the coming year?”).  For Question No. 16, respondents’ average spending expectation on a scale of 1-10 in this survey was 3.96, down slightly from 4.03 last week but still in-line with the 3.85-4.05 range we’ve been seeing over the past four weeks of asking this question.

For Question No. 16, respondents expect to spend nearly $24,000 on dental equipment over the coming 12 months, a 3% sequential increase from last week’s NTM spending expectations ($23,038) and just shy of the $23,921 COVIDera high we saw two weeks ago. Additionally, this week’s NTM dental equipment spending of $23,814 is more than a  50% rebound off the $15,500 trough on NTM expected equipment spending we found in our March 19 survey, and for a third straight week, this spending figure sits only ~10-15% below spending expectations we found in our March 12 survey which (as we noted above in an earlier question) is the last survey we ran in what we’d consider the “pre-COVID era” prior to states starting to shut down across the country.

As for the year-over-year spending changes we found in this week’s survey, respondents expect to spend just over $12,500 less on dental equipment over the next twelve months relative to the prior twelve months (respondents this week say they spent nearly $36,000 on dental equipment over the past year and now expect to spend ~$24,000 on dental equipment over the coming 12 months).  While this is a worse y/y expected spending decline than the $9,500 y/y expected decline we found in last week’s survey, it’s still much better than the $15,000-$19,000 expected spending declines we were finding in our surveys throughout the latter parts of March and early April at the onset of the pandemic.  As such, we continue to believe that while these recent survey updates suggest spending on dental equipment will likely be pressured over the near-to-intermediate term due to COVID-19 disruptions, these headwinds may not be overly sizable and not nearly as bad as we had previously been expecting.  

Price Target Justification and Risks

ALGN. Our $325 price target applies a 30x multiple to our NTM EBITDA projection of $770M, a just over 10% premium to the company’s five-year NTM EBITDA multiple of 27x, with this premium multiple warranted, in our view, by both the solid secular growth expectations we have for the clear aligner market in general over coming years, as well as the potential opportunities we see for clear aligner market demand to accelerate notably over coming quarters given the growing efficiencies clear aligners in general, and Invisalign specifically (with SmartTrack, Virtual Solutions, etc.), provide for dental practitioners. Risks to achieving our price target include: (1) highly competitive industry; (2) growing new market entrants in the comprehensive part of the market, including from 3M, NVST, XRAY, and others; (3) risk of shifting consumer purchasing behavior for clear aligners as DTC providers such as SDC, Candid, and others continue to spend aggressively; (4) risk that shifting mix to lower acuity cases in DSOs and other offices and/or growing doctor retention costs continue to pressure ASPs and drive revenue/earnings growth below case shipment growth over the longer term; (5) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions; and (6) risk that the coronavirus headwinds that are expected to impact ALGN significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

 HSIC. Our $68 price target applies an 18x multiple to our forward year NTM EPS projection of $3.80, with the 18x multiple warranted by improving end market feedback for the global dental market. We remind investors that unlike most other medtech and dental peers, HSIC does not exclude deal-related amortization from its EPS calculation, and if we do exclude such amortization from HSIC’s financials for an apples-to-apples comparison, then our $68 price target assumes ~16.5x our forward year NTM EPS projection of $3.80. This apples-to-apples 16.5x multiple represents a discount to the ~20-22x five-year average range of NTM P/E average multiples at which we estimate HSIC’s medtech peer group has historically traded and is below the 19-21.5x multiple we’re currently using to value dental manufacturers NVST (19x) and XRAY (21.5x), with the discount vs. medtech peers and dental manufacturers warranted, in our view, by the larger secular uncertainties we see for dental manufacturers due to rising DSO channel power and potential customer retention risk in an era of pressured dental practice profitability and growing online dental discount dealers. Risks to achieving our price target include: (1) highly competitive industry; (2) risk of shifting dental (and to a lesser extent medical) purchasing behavior to on-line or other discount dealers that provide less service and support to dental (and medical) offices relative to HSIC; (3) risk that growing demand for product from DSOs could continue to pressure ASPs as DSOs grow in size and leverage their greater channel power; (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions; and (5) risk that COVID-19 headwinds reaccelerate later this year.

 NVST. Our $27 price target applies a 19x multiple to our forward year NTM EPS projection of $1.43. This 19x multiple also represents a 1-3 point discount to the 20-22x 5-year average NTM P/E multiple range at which we estimate NVST’s broader medtech peer group has historically traded, with the discount warranted, in our view, by the longer-term growth challenges we believe facing dental vs. other parts of medtech. Risks to achieving our price target include: (1) highly competitive industry; (2) longer-term potential changes in relationships with dental dealers, as 50% of company-wide revenue is tied to products sold through dental distributors; (3) financial and integration risk associated with potential future M&A activity; (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions; and (5) risk that COVID-19 headwinds reaccelerate later this year.

 PDCO. Our $23 price target on PDCO assumes ~15x our forward year NTM EPS projection of $1.52, roughly a one and a half point discount to the multiple we’re using to value industry peer HSIC on an apples-to-apples basis (excluding deal-related amortization for both companies). While we’ve historically used a bigger discount to value PDCO vs. HSIC, the narrower discount we use to value PDCO today reflects the improved execution we’ve seen out of PDCO management in recent quarters, even though we continue to believe at least a modest valuation discount for PDCO vs. HSIC is warranted by HSIC’s better performance history and more appealing mix of non-dental business (we view HSIC’s medical business to be more attractive from a longer-term perspective than PDCO’s mix of companion and production animal health businesses). Risks to achieving our price target include: (1) highly competitive industries; (2) risk of shifting dental (and to a lesser extent companion animal) purchasing behavior to on-line or other discount dealers that provide less service and support to dental (and vet) offices relative to PDCO; (3) risk that growing demand from DSOs could continue to pressure ASPs as DSOs grow in size and leverage their greater channel power; (4) general macroeconomic risk, especially in the near term as COVID-19 issues raise global macroeconomic questions; and (5) risk that the coronavirus headwinds that are expected to impact PDCO significantly in 2020 may not resolve as quickly as we currently expect heading into 2021.

XRAY. Our $55 price target applies a 21.5x multiple to our forward year NTM EPS estimate of $2.58, with this multiple higher than previous valuations we’ve used given improving end market dynamics that we believe can ultimately support greater demand for XRAY’s high-tech Primescan and Primemill products in the U.S. and across Europe and Japan later this year and into 2021. This 21.5x multiple is roughly in line with the 20-22x 5-year average NTM P/E multiple range at which we estimate XRAY’s broader medtech peer group has historically traded, warranted, in our view, by our expectations that XRAY’s longer-term revenue and earnings growth could return to the 3-5% and uppersingle/low-double-digit ranges over coming quarters, levels that are largely in line with medtech peers. Risks to achieving our price target include: (1) highly competitive industry; (2) reliance on high tech dental equipment sales (including Primescan and Primemill) that could be negatively impacted near-term by recent dental end market pressures, (3) financial and integration risk associated with potential future M&A activity, (4) general macroeconomic risk, especially in the near term given ongoing COVID-19 uncertainties, and (5) risk that COVID-19 headwinds reaccelerate later this year.

Appendix - Important Disclosures and Analyst Certification

Approved on 12 April 2020 21:14EDT/ Published on 13 April 2020 01:05EDT.

Covered Companies Mentioned
All stock prices below are the 6/12/2020 closing price.

Align Technology, Inc. (ALGN – $251.40 – Outperform)
DENTSPLY Sirona, Inc. (XRAY – $43.38 – Outperform)
Envista Holdings Corporation (NVST – $19.54 – Outperform)
Henry Schein, Inc. (HSIC – $56.63 – Neutral)
Patterson Companies, Inc. (PDCO – $17.77 – Neutral)
(See recent research reports for more information)

1 Robert W. Baird & Co. Incorporated makes a market in the securities of ALGN, HSIC, NVST, PDCO and XRAY.

10 Robert W. Baird & Co. Incorporated and/or its affiliates have been compensated by Henry Schein, Inc. for non-investment bankingsecurities related services in the past 12 months.

2 Robert W. Baird & Co. Incorporated and/or its affiliates managed or co-managed a public offering of securities of Envista HoldingsCorporation in the past 12 months.

3 Robert W. Baird & Co. Incorporated and/or its affiliates have received investment banking compensation from Envista HoldingsCorporation in the past 12 months.

Appendix – Important Disclosures and Analyst Certification
Robert W. Baird & Co. Incorporated (“Baird”) and/or its affiliates expect to receive or intend to seek investment-banking related compensation from the company or companies mentioned in this report within the next three months. Baird may not be licensed to execute transactions in all foreign listed securities directly. Transactions in foreign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information.
Investment Ratings: Outperform (O) – Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) – Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) – Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months.
Risk Ratings: L – Lower Risk – Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A – Average Risk – Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H – Higher Risk – Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S – Speculative Risk – High growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges.
Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report.
Distribution of Investment Ratings. As of May 29, 2020, Baird U.S. Equity Research covered 725 companies, with 60% rated Outperform/ Buy, 39% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 12% of Outperform/Buy-rated and 5% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months.
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Analyst Certification
The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst’s personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.
Disclaimers
Baird prohibits analysts from owning stock in companies they cover.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
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Other Disclosures
The information and rating included in this report represent the research analyst’s views based on a time horizon of 12 months, as described above, unless otherwise stated. In our standard company-specific research reports, the subject company may be designated as a “Fresh Pick”, representing that the research analyst believes the company to be a high-conviction investment idea based on a subjective review of one or more fundamental or quantitative factors until an expiration date specified by the analyst but not to exceed nine months. The Fresh Pick designation and specified expiration date will be displayed in standard company-specific research reports on the company until the occurrence of the expiration date or such time as the analyst removes the Fresh Pick designation from the company in a subsequent, standard company-specific research report. The research analyst(s) named in this report may, at times and at the request of clients or their Baird representatives, provide particular investment perspectives or trading strategies based primarily on the analyst’s understanding of the individual client’s objectives. These perspectives or trading strategies generally are responsive to client inquiries and based on criteria the research analyst considers relevant to the client. As such, these perspectives and strategies may differ from the research analyst’s views contained in this report.
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Dividend Yield. As used in this report, the term “dividend yield” refers, on a percentage basis, to the historical distributions made by the issuer relative to its current market price. Such distributions are not guaranteed, may be modified at the issuer’s discretion, may exceed operating cash flow, subsidized by borrowed funds or include a return of investment principal.
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The contents of this report may contain an “investment recommendation”, as defined by the Market Abuse Regulation EU No 596/2014 (“MAR”). This report does not contain a “personal recommendation” or “investment advice”, as defined by the Market in Financial Instruments Directive 2014/65/EU (“MiFID”). Please therefore be aware of the important disclosures outlined below. Unless otherwise stated, this report was completed and first disseminated at the date and time provided on the timestamp of the report. If you would like further information on dissemination times, please contact us. The views contained in this report: (i) do not necessarily correspond to, and may differ from, the views of Robert W. Baird Limited or any other entity within the Baird Group, in particular Robert W. Baird & Co. Incorporated; and (ii) may differ from the views of another individual of Robert W. Baird Limited.
This material is distributed in the UK and the European Economic Area (“EEA”) by Robert W. Baird Limited, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB and is authorized and regulated by the Financial Conduct Authority (“FCA”) in the UK. For the purposes of the FCA requirements, this investment research report is classified as investment research and is objective. This material is only directed at and is only made available to persons in the EEA who would satisfy the criteria of being “Professional” investors under MiFID and to persons in the UK falling within Articles 19, 38, 47, and 49 of the Financial Services and Markets Act of 2000 (Financial Promotion) Order 2005 (all such persons being referred to as “relevant persons”). Accordingly, this document is intended only for persons regarded as investment professionals (or equivalent) and is not to be distributed to or passed onto any other person (such as persons who would be classified as Retail clients under MiFID).
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Please note that this report may provide views which differ from previous recommendations made by the same individual in respect of the same financial instrument or issuer in the last 12 months. Information and details regarding previous recommendations in relation to the financial instruments or issuer referred to in this report are available at https://baird.bluematrix.com/sellside/MAR.action.
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Robert W. Baird Limited and Robert W. Baird & Co. Incorporated have in place organisational and administrative arrangements for the prevention, avoidance, and disclosure of conflicts of interest with respect to research recommendations. Robert W. Baird Limited’s Conflicts of Interest Policy, available here, outlines the approach Robert W. Baird Limited takes in relation to conflicts of interest and includes detail as to its procedures in place to identify, manage and control conflicts of interest. Robert W. Baird Limited and or one of its affiliates may be party to an agreement with the issuer that is the subject of this report relating to the provision of services of investment firms. Robert W. Baird & Co. Incorporated’s policies and procedures are designed to identify and effectively manage conflicts of interest related to the preparation and content of research reports and to promote objective and reliable research that reflects the truly held opinions of research analysts. Robert W. Baird & Co. Incorporated’s research analysts certify on a quarterly basis that such research reports accurately reflect their personal views.
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