Stocks to Sink Your Teeth Into
Dental-supply companies are riding the aging baby-boomer wave, without pesky pricing problems and regulatory issues.
By Corey Hajim

(FORTUNE Magazine) –

Spending more time at your dentist lately? You're not alone. A recent study by economists at the Centers for Medicare and Medicaid Services estimates that in 2005, Americans will shell out $84 billion for dental care, more than double what they spent in 1993--and that figure will grow 6.3% to 6.9% annually through 2014, when total outlays will reach $147 billion. That trend may be tough on your wallet, but it's good news for dental-supply companies like Dentsply and Sybron.

One reason we're paying more for dental care is that we're living longer--and keeping our teeth. Another is that there are more things dentists can do to make teeth look good. In the early 1970s, according to government statistics, about 46% of people ages 65 to 74 had lost all their teeth. Twenty years later that figure dropped to less than 29%. "People know they will live longer and are going to great lengths to keep their natural teeth," says Floyd Pickrell Jr., CEO of Sybron. That means regular visits to the dentist not only for the basic "drill and fill" but for more complex procedures like implants, caps, veneers, root canals, and orthodontics.

The dental-supply business is "beautifully boring," says Suey Wong, an analyst at Robert W. Baird in Milwaukee. That's because it has many of the same growth drivers as the broader health-care sector--but not all the reimbursement, managed care and pricing issues. It's a corner of the health-care industry that offers "solid, consistent growth," says Wong. "All of the benefits of med tech without the headaches."

Dental-supply companies have also proved to be fairly recession resistant. Pickrell says he's never seen a downturn, and even during the big recession in 1991, "right through it you saw growth. It is one of the last things to go." Another positive is the potential for consolidation. The industry is highly fragmented, with the two largest companies accounting for only about 20% of the overall market.

Dentsply (XRAY, $57) is the industry's biggest player, with a $4.5 billion market cap and an estimated 17% market share. CEO Gary Kunkle Jr. cites the company's scale as a key advantage: "If we buy a smaller company, we can put its products into our network and be in 120 countries in the next month." Indeed, while the company has been growing internally, acquisitions have been a key part of its strategy. Dentsply has done more than 30 acquisitions in the past decade, and, with about $5 a share in cash on hand, it can do a lot more. Acquisitions and internal innovation have helped Dentsply churn out a stream of new products. Last year, for example, the company introduced more than 25, including Oraqix, a noninjectable anesthetic gel, and BioPure, a cleansing agent used during root canals. That kind of innovation is essential, considering that in 2004, 40% of Dentsply's $1.7 billion in revenue came from items introduced in the past five years--even though most have annual sales of less than $25 million.

Sybron (SYD, $43) is a smaller company (market cap: $1.7 billion) that also uses acquisitions as part of its growth strategy. Pickrell says he is always looking at four or five potential companies to buy and would like to add two to four percentage points of sales growth through deals each year. New products are crucial for Sybron, as well. It launched more than 20 offerings in the past year, most aimed at helping dentists become more productive. "It is not a business that has demand issues," says Pickrell. "It has capacity issues." Pickrell sees significant promise for Sybron's Damon 3, a new orthodontic device, and Premise nanocomposite, a natural-colored material used in restoration work.

Both Dentsply and Sybron are expected to post low double-digit profit gains next year. They aren't cheap, trading at 19 times and 21 times estimated 2006 earnings, respectively, vs. 15 for the S&P 500. But both have strong positions in a booming market, and Wong, for one, thinks their P/Es will increase from here, "given their moves into specialty areas with higher margins and accelerating growth." Don't forget to floss!