NVST - Envista: Still Bullish Considering 2024 Outlook And Inorganic Growth Drivers

2023-10-31 13:00:00 ET

Summary

• NVST expects to spend a significant $1 billion on M&A deals in the coming years.
• Envista's FY 2024 financial performance is expected to be better than that for FY 2023, considering consensus estimates and the management's comments.
• NVST is still deserving of a Buy rating, taking into account its prospects for next year, and the potential to create value with acquisitions.

Elevator Pitch

My Buy investment rating for Envista Holdings Corporation ( NVST ) shares remains intact. I previously evaluated NVST's "revenue mix and portfolio transformation" in my earlier write-up for the company published on August 22, 2023.

I am leaving my Buy rating for NVST unchanged in the current article. In the short term, I expect Envista to deliver better financial results next year. For the mid to long term, Envista can continue to enhance shareholder value with accretive acquisitions and divestitures.

Watch Out For Future Divestments And Acquisitions

Earlier, I noted in my August 22 article that "NVST's portfolio transformation is still in progress" with expectations of "further margin improvement and sales growth acceleration." At its most recent investor outreach event, the Baird 2023 Global Healthcare Conference , Envista shared plans for further optimizing the company's business portfolio to create value for its shareholders.

NVST's imaging business has been suffering because of weak demand and the lack of pricing power. Envista disclosed at the Baird investor event that it had already "exited almost 10% of our imaging business over the past 4 quarters." In the last four years, Envista has divested $0.4 billion worth of underperforming and non-core businesses.

Moving ahead, NVST has plans to dispose of other businesses where it is "not competing" and the "margin is not there", as per the company's management commentary at the Baird 2023 Global Healthcare Conference.

With respect to new investments, Envista allocated roughly $1 billion to Mergers & Acquisitions or M&A in the past four years. Looking forward, NVST's goal is to spend another $1 billion on M&A deals in the coming three years. M&A is in Envista's DNA, as the company was built up over time with 30 M&A transactions with an aggregate investment of $7 billion when it was still a business arm of Danaher Corporation ( DHR ).

Envista revealed at Baird's latest investor conference that the company has a "M&A committee that looks at all the (potential) targets on a monthly basis." This is about as active as any company can be in terms of identifying and assessing businesses or assets that are up for sale.

An example of an area where NVST could be very interested in acquiring new companies to accelerate its growth is 3D printing. Envista specifically stressed at the Baird 2023 Global Healthcare Conference that the current penetration rate of 3D printing in the dental market is still below 30%.

As an illustration of the positive top line contribution from inorganic growth drivers, Envista's revenue expanded by +2.6% YoY in the most recent quarter, with M&As on a stand-alone basis driving a +1.7% YoY top line increase.

In summary, there is still lots of upside that can be derived from NVST's future portfolio management activities such as acquisitions and divestitures.

2024 Is The Year Of Turnaround

Envista's stock price has declined by -30.7% this year thus far, which isn't surprising considering the expectations for the company's 2023 financial performance. NVST has guided for a low single digit percentage increase in its core sales and a normalized EBITDA margin of more than 20% (Envista's FY 2022 EBITDA margin was 20.1%) in FY 2023. This implies that Envista is expecting to report modest top line expansion and flattish operating profit margins for the current fiscal year.

Things are expected to get much better for NVST next year.

According to the Wall Street analysts' consensus financial projections sourced from S&P Capital IQ , Envista is forecasted to register a mid-single digit top line growth rate, or +5.6% in specific terms, for fiscal 2024. The sell side also sees NVST's EBITDA margin improving by +0.8 percentage points to 20.9% in FY 2024.

Even though Envista didn't provide specific quantitative financial guidance for FY 2024 at the Baird 2023 Global Healthcare Conference, NVST's management commentary indicates that next year will very likely be the year that the company witnesses a significant turnaround in its business operations. Envista noted at the Baird investor conference that the company is expected to "start seeing better performance in 2024" and "a much better margin structure as we come out of 2024."

The key top line growth and profit margin drivers for NVST in the coming year are the Spark clear aligners business and the dental implants business. Envista's dental implants business is witnessing improving business conditions in Mainland China, while the company's Spark clear aligners business is well-positioned for margin expansion as it benefits from economies of scale.

Concluding Thoughts

Envista is trading at below fair valuation with PEG or Price-To-Earnings Growth ratio of less than 1. NVST's PEG valuation multiple is 0.85 times, based on a consensus forward FY 2024 P/E of 11.36 times and a consensus forward FY 2024-2026 normalized net profit CAGR of +13.3% (source: S&P Capital IQ ). I see NVST's shares rising on the back of a superior set of results in 2024 and the company's portfolio management moves, and this is why I have stuck to a Buy rating for Envista.

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