SAUHF - Straumann Holding: A Global Leader But Too Expensive For Me

2023-04-02 11:40:00 ET

Summary

• Straumann, a Swiss company, is a leader in the orthodontic and tooth replacement market.
• The excellent reputation of the company and impressive growth rates result in a premium valuation as the stock trades at 50 times its 2022 earnings.
• Although we can expect the revenue and net income growth to continue at a rate of just under 10%, this still doesn't make the stock cheap.
• I think the company is trading at about 30 times its 2025 earnings and at in excess of 20 times the anticipated EBITDA for 2025.

Introduction

Straumann Holding ( SAUHF ) ( SAUHY ) is the holding company of the Straumann Group, one of the largest companies focusing on orthodontics and tooth replacement in the world. The company is active on all continents (probably even Antarctica if there is a dentist present at the scientific research stations), and as Straumann is known for its quality, the revenue tends to be very sticky and high margin as the gross margin in 2022 exceeded 75%.

Straumann’s primary listing is in Switzerland where the stock is trading with STMN as ticker symbol . The average daily volume is almost 300,000 shares resulting in a monetary value of in excess of 35M CHF per day. As Straumann trades in Swiss Francs and releases its results in Swiss Francs, I will use the CHF as base currency throughout this article.

The demand for Straumann’s products remains strong

Except for the Asia-Pacific region where Straumann still had to deal with the fallout of China’s very restrictive COVID-policy, the organic growth rate shows double digit figures across the board with Latin America performing very strong with a 30% organic revenue increase.

The total revenue in 2022 was approximately 2.32B CHF , which is approximately 15% higher than the 2.02B CHF reported in 2021. As mentioned in the introduction, Straumann’s margins are pretty impressive and the gross margin came in at just over 75% in 2021. Even after deducting the distribution and administrative expenses, the operating profit exceeded 535M EUR.

With a pre-tax income of 498M EUR and a net income of just under 435M EUR, Straumann clearly performed very well and the EPS jumped from 2.49 CHF in 2021 to 2.73 CHF in FY 2022. With the stock trading at almost 140 CHF, Straumann is trading at approximately 50 times its 2022 earnings.

That is pretty rich so I was hoping the company’s cash flow statement would give me a better reason to be interested in buying the stock at the current levels. Unfortunately Straumann is also pretty expensive from a free cash flow point of view.

As you can see below, Straumann reported an operating cash flow of 415M CHF. That being said, this result includes a net investment of almost 174M CHF in the working capital position. Additionally, Straumann paid 105M CHF in cash taxes although the income statement clearly shows it owes less than 64M CHF over FY 2022.

This means the adjusted operating cash flow is approximately 630M CHF. We should still deduct the 29M CHF in lease payments (see below) for an adjusted operating cash flow of 601M CHF.

The total capex was approximately 194M CHF (excluding M&A) which means the underlying free cash flow result was 407M CHF. Considering there are just over 153M shares outstanding, the free cash flow result was approximately 2.65 CHF per share which also means the stock is trading at a 2% free cash flow yield based on the 2022 results.

Of course, it’s always important to be forward-looking and Straumann’s guidance for 2023 is quite interesting. The company expects to continue to gain market share while the demand from China should boost the performance of the Asia-Pacific division. For 2023, Straumann expects a high single digit organic revenue growth . The operating margin should be approximately 25% which means that an 8% revenue increase should boost the operating income to 626M CHF which would be a 17% increase.

That would be a very decent result and a double digit increase in the operating income could justify the current valuation of the stock. A 626M CHF operating income should result in a net profit of approximately 475-485M CHF for an EPS of 3.10-3.20 CHF. Great, but even if that result could be achieved, Straumann is still trading at more than 40 times its anticipated earnings for 2023. And as Straumann is paying a dividend of just 0.80 CHF per share, the company isn’t suitable as an income pick either.

Investment thesis

This doesn’t mean the current valuation is unreasonable considering the operating profit will likely continue to increase at a double digit pace in the next few years, and I’m pretty sure the earnings will exceed 4 CHF per share by 2025 (and perhaps even come in closer to 4.5 CHF), but paying 30 times the anticipated 2025 earnings still is a bit too rich for my blood. Fellow author Yannick Frey was 100% correct when he called Straumann a ‘buy’ in December 2022 , but as the share price has increased by approximately 30% since his call, I personally think a ‘hold’ is more appropriate here, as despite the net cash position of 216M CHF (or approximately 1% of the current share price), the stock is still trading at in excess of 20 times the anticipated 2025 EBITDA, even after assuming the company will retain a few hundred million francs in free cash flow per year.

I’m on the sidelines. Straumann is a quality business and is a world leader in its domain but the stock is just too expensive for me right now.

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