[1]How long have you held Sirona?
The Five Oceans World Fund has held Sirona Dental Systems since August 2011. The stock was acquired at an average price of around US$45 per share and is currently trading around US$73 per share.
[2]Sirona Dental Systems is listed on the NASDAQ exchange but is based in Germany. It is one of the world’s largest manufacturers of dental equipment, offering a complete spectrum of products including CAD/CAM restoration systems, imaging systems, dental treatment centres, hand pieces and sterilizers. It is now the main pure play in the dental equipment sector. Other competitors include the dental divisions of diversified industrials in US listed Danaher Corporation (which we also own), and 3M Co.
What do you like about it?
We like the long-term growth outlook for the $4.5 plus billion dental equipment market and Sirona’s strong competitive position within it. The overall market has a number of positive structural drivers including an increasing global population, a demographic shift towards an ageing population of adults aged 65 plus (who have greater dental needs), and longer retention of natural teeth (requiring increasing preventative, restorative and cosmetic treatment).
Sirona plays in the high-tech dental equipment and technology market and is the only manufacturing company that can fully outfit a dentist’s office. It offers treatment centres, imaging systems, dental CAD/CAM systems and instruments. The market penetration for higher tech equipment is still relatively low with many traditional dental practices still using old technology.
How is it better than its competitors?
Sirona has enjoyed much success with its market leading technology in digital imaging systems (Galileos) and chairside CAD/CAM restoration systems (CEREC and inLab). It is recognised as the global innovation leader and overall it has an estimated 20% share of the dental equipment market. It is gaining market share as it rolls out new innovative products and as it builds out its sales and service networks in both developed and faster growing markets.
It continuously innovates and invests heavily in research and development (R&D). It currently employs more than 250 engineers and scientists and has invested over $US250 million in R&D over the past six years.
What do you like about its management?
Sirona’s key management are very experienced in terms of operational and financial management and are also co-owners of the business with material share-based compensation. Management has delivered top-line growth while expanding margins and cash flow is very strong. Management understands that future success depends on continuous innovation and they strive to be at the forefront of future practices and lab equipment.
Management also understands that different markets have different needs and offer a wide spectrum of products and solutions. The company nurtures talented executives through the ranks to ensure smooth succession planning.
What is your target price on Sirona?
We have a target price in the mid US$80s per share.
At what point would you sell it?
Generally we like to hold stocks for three to five years. We will sell if we feel the current price reflects full value for the company at a point in time given our outlook, if the company materially misfires on some aspect of its business strategy or if we have a better portfolio idea.
How much has it added to your overall portfolio over the last 12 months?
The stock is up around 45% in the last year which, given the size of the position, translates into more than half a percent of contribution to the overall return of the Five Oceans World Fund for that period.
Is it a liquid stock?
Yes, the stock trades around $US18 million daily and is relatively liquid for a mid-cap company with a market capitalisation of approximately $US4 billion. The stock is around a 1.5% holding in the Five Oceans World Fund.
Where do you see the value?
While offering market leading technology, Sirona is yet to reach its full potential as it has plenty of room to grow both through geographic expansion of its sales and service network, and through increasing industry adoption of its superior technology. Historically, given its German roots, the company has had a strong footprint in Europe. Growth in the US, through market share gains, is a big opportunity for Sirona, as well as the developing market dynamic discussed earlier.
By Kim Tracey
Kim Tracey is a portfolio manager with Five Oceans Asset Management. She has over 15 years’ experience in corporate analysis and funds management and has held senior positions at Hunter Hall Investment Management and Merrill Lynch Investment Management.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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