Elevator Pitch
I rate Envista Holdings Corporation (NYSE:NVST) as a Hold.
My prior write-up published on October 31, 2023 was focused on analyzing Envista’s M&A growth potential and 2024 financial prospects. With this latest update, I draw attention to NVST’s most recently announced financial results for the final quarter of the previous year.
Both the company’s actual Q4 2023 EBITDA margin and its forward-looking FY 2024 EBITDA margin guidance were lower than what the sell-side analysts had forecasted. Weaker-than-expected profitability for Envista prompted me to downgrade the stock’s rating from a Buy to a Hold. But I didn’t assign a Sell rating to NVST, as I think that there is a good chance that the company’s future capital structure optimization and long-term profitability target disclosure could be potential catalysts for the stock.
Both Earnings And Guidance Were Below Consensus Estimates
As indicated in the company’s latest quarterly results released on February 7th after trading hours, both the top line and bottom line for Envista contracted on a YoY basis in Q4 2023.
NVST’s revenue declined by -2.3% YoY to $645.6 million in the fourth quarter of the prior year, even though the company’s actual Q4 top line was +1.1% better than the consensus sales forecast of $638.4 million. More importantly, Envista suffered from a substantial -13.6% earnings miss for the most recent quarter. Specifically, NVST’s normalized EPS fell by -44.2% YoY to $0.29 for Q4 2023 as compared to the consensus bottom line estimate of $0.34 per share.
Envista noted in its Q4 2023 earnings presentation slides that its recent quarterly top line was hurt by factors like “macro uncertainty” and “selective portfolio optimization.” The decline in sales for NVST was no surprise as evidenced by the company’s slight revenue beat for the recent quarter.
However, NVST’s fourth quarter profitability was significantly below expectations. The company’s normalized EBITDA margin decreased by -5.3 percentage points YoY from 20.9% for Q4 2022 to 15.6% in Q4 2023. Notably, Envista’s actual EBITDA margin for the most recent quarter came in roughly -40 basis points lower than the consensus EBITDA margin projection of 16.0% (source: S&P Capital IQ).
To make things worse, the company doesn’t expect an improvement in its operating profitability for the new fiscal year. Envista has guided for its non-GAAP adjusted EBITDA margin to decline from 18.1% in FY 2023 to 16.5% (mid-point of guidance) for FY 2024. Prior to NVST’s Q4 results release and the issuance of FY 2024 guidance, Wall Street had anticipated that Envista’s normalized EBITDA margin will remain stable at 18.1% in this fiscal year as per S&P Capital IQ consensus data.
At its Q4 2023 results briefing, NVST revealed that its high-margin “Bracket & Wires business” has “one third” of revenue derived from foreign markets, including those “in the middle of these geopolitical challenges” such as Russia. In other words, the negative change in sales mix for Envista is the major factor contributing to below-expectations earnings and EBITDA guidance for the company.
Earlier, I shared my expectations that Envista should be able to record “a superior set of results in 2024” with my end-October 2023 article. I have been proven to be wrong based on the company’s recent results, guidance, and management commentary.
Watch Out For New CFO Appointment
In late July last year, NVST announced that Howard Yu, the company’s former CFO, will leave the company on September 22, 2023. In the same announcement, it was noted that Stephen Keller will assume the position of “interim principal financial officer” when Howard Yu departs. Stephen Keller was previously responsible for investor relations at Envista, and he has relevant experience having previously served as “Vice President of Finance, Asia” at Avery Dennison (AVY) as highlighted on NVST’s corporate website.
Envista revealed at the company’s recent fourth quarter earnings call that it has “some very strong candidates, and our goal is to have that name (permanent CFO) as quickly as possible in the near future.” This implies that the appointment of a new CFO is likely to happen sooner rather than later.
I am of the view that the new CFO appointment might be a favorable development for two key reasons.
One reason is that there will be greater clarity on NVST’s long-term financial goals when a new CFO is formally appointed.
Previously, Envista had decided to organize its Investor Day (otherwise referred to as the Envista Summit by the company) on February 16. But NVST indicated at its latest quarterly earnings briefing that the date for the 2024 Investor Day will be pushed back until a new CFO comes aboard. As detailed in the preceding section of this article, NVST’s FY 2024 EBITDA margin guidance wasn’t as good as what the market was expecting. As such, investors will be watching Envista’s 2024 Investor Day closely, especially with regards to the company’s intermediate-to-long term profitability target.
The company had emphasized at its most recent quarterly earnings call that its approach of “creating long-term value by expanding growth, by expanding margin, by shifting our portfolio” hasn’t “radically changed”, when asked about its outlook for the long run. This seems to imply that Envista still has confidence in its long-term prospects. At its 2023 Investor Day in February last year, NVST outlined its FY 2026 EBITDA margin goal of 22.5%. If NVST’s updated EBITDA margin target disclosed at the 2024 Investor Day is the same or just slightly lower than its prior guidance, this should be viewed as a positive surprise. The earlier the new CFO is appointed, the earlier the 2024 Investor Day revealing Envista’s profitability target can take place.
The other reason is that there might be favorable changes made to Envista’s future capital management strategy following the appointment of a new CFO.
NVST stressed at the company’s Q4 2023 results call that “we need to talk about the capital structure”, but it has “decided to postpone that conversation” as the company has yet to appoint a new CFO.
It is worthy of note that Envista’s net interest cost rose by +65.1% to $63.4 million for full-year FY 2023, which represented 23.6% of the company’s normalized net profit last year. This implies that NVST’s bottom line performance would have been much better, if it hadn’t been burdened by high interest expenses. Therefore, there is the potential for NVST to optimize its capital structure to lower its interest costs once the new CFO is in the office.
Closing Thoughts
The market is now valuing Envista at 15.8 times consensus next twelve months’ normalized P/E, or at a 24% discount to its all-time historical average P/E of 20.9 times (source: S&P Capital IQ). I think this valuation discount is warranted considering the company’s disappointing FY 2024 EBITDA margin guidance. On the flip side, there are potential catalysts like capital structure optimization and the updated long-term profitability target disclosure at the 2024 Investor Day. Taking into account potential re-rating catalysts and the below-expectations operating profitability guidance, I think it is fair to have a Hold rating for Envista.
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