Key Market Outlook(s) and Pick(s)
On Tuesday, I joined Stuart Varney on Fox Business “Varney & Co” to discuss markets, outlook, Iran, oil, $AAP, $PZZA, and more. Thanks to Stuart and Maggie Edwards for having me on:
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Dentsply Sirona Update
Dentsply Sirona reported solid 4Q results that were well received by the market, sending shares +15% higher as new CEO Dan Scavilla continues executing the turnaround playbook in just his third earnings call since taking the helm.
As we have said from day one, much of the heavy lifting in the XRAY turnaround was carried out under prior management, which spent the past several years course-correcting and stabilizing the business by taking ~$300M of costs out through a 10% headcount reduction, a 60% SKU reduction, and consolidation across the supply chain and manufacturing footprint. While prior management got the house in order from a cost and efficiency standpoint, those efforts could only go so far. You cannot cut your way to growth. FY25 marked the second consecutive year of sales declines (-3% in FY25, -4.3% in FY24). To be fair, the dental sector is highly cyclical and just starting to emerge from a trough, but XRAY has still lagged peers in the recovery.
That’s exactly what Scavilla has been brought in to fix. He is coming in at what we see as effectively the 10-yard line of the turnaround with one job: spike the football and return the business to growth. The plan is centered on fixing the U.S. business (~32% of sales), which remains the primary drag on the portfolio with sales down 12.3% in FY25, while Europe and the rest of the world have already begun to inflect back toward growth.
Scavilla is wasting no time making his presence felt, ripping off the band-aid with a multi-pronged plan aimed squarely at restoring profitable growth in the U.S. The turnaround playbook is built around a significant double-digit increase in R&D spend to accelerate innovation, stepping up from ~4% of sales to the 5–6% range, a reorganized commercial team under new proven leadership, and the re-engagement and expansion of key distributor relationships (Patterson, Benco, Burkhart, A-dec, etc.) that prior management had cut ties with.
And while we said the vast majority of the cost-focused heavy lifting had already been done, management surprised us with an additional ~$120M of costs to be squeezed out of the business, savings that will allow XRAY to fully fund the R&D ramp without any trade-off on the margin front.
We won’t have to wait long to see the plan start bearing fruit. Management is targeting sequential acceleration in the back half of FY26 with an inflection to growth in the U.S. expected in 4Q, and importantly, that target is expected regardless of the broader dental market, with any improvement representing pure upside. That should set the stage for a solid return to growth in FY27 and beyond.
While the market is warming up to the Scavilla playbook, consensus remains firmly in show-me mode, with growth expectations still depressed at just 2% from FY27 to FY29. Even with the recent move higher, XRAY is still trading at a 50%+ discount to top competitor Envista, the widest gap on record and one we expect to narrow.
XRAY’s own history tells the same story. Over the past two decades, the company has traded at ~18x forward earnings. Today, the multiple sits at just 8.9x, leaving plenty of room for mean reversion.
A couple of quarters of clean, consistent execution will go a long way for Dentsply, something that has been hard to come by over the past several years of operational hiccups. With the right pieces now in place, a new CEO running at full speed, and the business approaching an inflection point, it won’t take much more than modest execution and improvement to drive meaningful multiple expansion as the narrative shifts away from the troubles of the past and toward where the puck is going next.
At the pace Scavilla is moving, we don’t think investors will have to wait very long.
Q4 Earnings Breakdown
10 Key Points
1) XRAY posted 4Q revenue of $961M (+6.2% reported, +2.5% constant currency), beating consensus of ~$926M and bringing FY25 revenue to $3.68B (-3% reported, -4.3% constant currency), at the high end of the $3.6B–$3.7B guidance range. At the segment level, Wellspect Healthcare led the way (+6.6% reported, +3.9% constant currency), while Orthodontic & Implant Solutions remained the key drag (-12.6% reported, -13.4% constant currency). 4Q adjusted EPS of $0.27 (+4.9% Y/Y) came in slightly below consensus of ~$0.29, with FY25 adjusted EPS of $1.60 (-4.6% Y/Y) landing in line with guidance.
2) Gross margin in 4Q came in at 46.2%, down 300 bps Y/Y (vs. 49.2%), pressured by lower volume and a ~$15M tariff headwind. For FY25, gross margin declined 160 bps to 50.0% (vs. 51.6%), with similar drivers of lower volume and a ~$23M tariff headwind. Adjusted EBITDA margin declined 10 bps to 14.1% in 4Q, while FY25 adjusted EBITDA margin improved 150 bps to 18.1%. Looking ahead, management is targeting expense growth at half the rate of top line growth, positioning the business for strong operating leverage as the recovery takes hold.
3) XRAY continues to execute against its 24-month return to growth action plan introduced under new leadership, centered on fixing the US business (~32% of total sales). Management is planning a double digit increase in R&D spend in FY26, stepping up from ~4% of sales to the 5-6% range as they look to accelerate innovation. On the commercial side, the reorganization of the US sales team has already been completed, with new CCO Aldo Denti (proven winner from J&J) bringing in Mark Bezjak (20+ year veteran from Zimmer Biomet) to lead the NA sales force. Management sees the unified commercial team as better positioned to compete, with the realignment already driving stronger field engagement and sales force investments expected to become an increasingly key competitive advantage. XRAY expects these changes to start bearing fruit in 3Q, with sequential acceleration anticipated in the back half and an inflection to growth in the US targeted for 4Q, regardless of market conditions.
4) XRAY made progress repairing distributor relationships during the quarter, re-engaging and expanding distribution agreements with Patterson Dental, Benco Dental, Burkhart Dental Supply, and A-dec while continuing to advance discussions with additional dealers. Re-engaging the dealer channel is seen as a critical lever to broaden portfolio reach and improve go-to-market effectiveness in the US, with meaningful lift from these agreements expected in the back half supporting stabilizing growth over the medium term. The structure of these new agreements has also shifted to a drop ship business model, a move expected to benefit both parties, with the goal of full adoption across all vendors by 4Q.
5) Management announced a restructuring plan and indirect cost optimization program targeting $120M in annual savings to be redirected into return to growth initiatives. The program is expected to result in non-recurring charges of $55M to $65M, the majority of which will be cash expenses recognized in FY26 and FY27. Key drivers of the ~$120M in annual savings include building a faster, more scalable, and more profitable manufacturing and distribution network through resource consolidation, standardized packaging, and advanced planning and forecasting tools aimed at improving working capital and reducing product cost.
6) The headline announcement out of 4Q was the elimination of the quarterly cash dividend (~5% annual yield), freeing up ~$128M in annual cash flow. We weren’t surprised by the move and see it as a key “out” in the turnaround playbook, giving management the flexibility to redeploy capital toward debt repayment and opportunistic buybacks as early as late FY2026 at what management calls “bargain” prices — we certainly agree.
7) Free cash flow came in at $60M in 4Q (+66.7% Y/Y vs. $36M), bringing FY25 FCF to $104M (-63% Y/Y vs. $281M), with weakness driven by an unfavorable working capital swing. Management has made clear that FCF improvement is its top priority, expecting a recovery beginning in FY26 supported by a targeted 20% reduction in inventory, with the goal of returning the business to the “cash engine” it has historically been.
8) Net leverage remained flat Q/Q at 3.0x, with $326M in cash and equivalents against ~$2B in long term debt. The vast majority of debt maturities fall beyond 2030, with management committed to maintaining an investment grade credit rating and prioritizing debt reduction in the near term.
9) While the search for a permanent CFO continues to progress, XRAY appointed three new directors to its Board during the quarter as part of an ongoing Board refreshment, including James Forbes (former Vice Chairman of Investment Banking at Morgan Stanley), Brian McKeon (former CFO of IDEXX Laboratories), and Don Zurbay (former CEO of Patterson Dental).
10) For FY26, management guided net sales of $3.5B to $3.6B, with operational sales growth of -3% to -1%, excluding a -2.1% Byte headwind and a ~$30M one-time dealer capital equipment sell-through headwind. Management expects market conditions to remain relatively stable throughout the year, with any improvement representing additional upside and the return to growth in 4Q driven purely by internal execution. Adjusted EPS is guided to $1.40 to $1.50, with the midpoint representing a ~9% decline Y/Y.
Earnings Call Highlights
Morningstar Analyst Note
Pfizer Update
Q4 Earnings Breakdown
10 Key Points
1) Pfizer posted 4Q revenue of $17.6B (-3% Y/Y operationally, +9% ex-COVID products), ahead of consensus of $16.9B. Full year revenue came in at $62.6B (-2% operationally, +6% ex-COVID products), ahead of prior guidance of $62B. 4Q adjusted EPS of $0.66 (+5% Y/Y) beat expectations of $0.57, bringing FY25 adjusted EPS to $3.22 (+4% Y/Y).
2) Adjusted gross margins expanded 340 bps Y/Y to 71.1% (vs. 67.7%), bringing FY25 adjusted gross margins to 75.8%, +160 bps Y/Y (vs. 74.2%). Adjusted SI&A expenses decreased 5% to $4.1B in 4Q, bringing FY25 adjusted SI&A to $13.64B (-7% Y/Y). Looking ahead, management expects stable gross margins in FY26 relative to FY25, with a clear path to consistently returning to the mid-to-high 70% range over time. Adjusted SI&A is expected to decline further to $12.5B to $13.5B, with the midpoint implying a ~5% decrease as management continues to drive ongoing productivity and cost savings.
3) Recently launched and acquired products continue to deliver strong growth, with the portfolio growing 14% Y/Y operationally to $10.2B in FY25, helping to cushion the impact of upcoming LOEs through 2028. Some of the key contributors included Padcev (+22% to $1.94B), Abrysvo (+36% to $1.03B), and Nurtec ODT/Vydura (+13% to $1.42B).
4) The biggest highlight of the earnings release was the announcement of Pfizer’s Phase 2b VESPER-3 study results for PF-3944, its GLP-1 receptor agonist added via the recent $10B acquisition of Metsera. Results were encouraging, with the experimental monthly maintenance dose driving up to 12.3% placebo-adjusted weight loss at 28 weeks with no plateau observed, suggesting continued weight loss is expected as the study progresses through week 64. Pfizer also plans to use a higher dose regime in a planned Phase 3 trial, with models predicting up to 16% weight loss at week 28, alongside a tolerability profile that is potentially best in class. The monthly maintenance dosing format is a key differentiator for PFE, reducing dosing frequency fourfold while maintaining efficacy and a favorable safety profile, a first for the industry. Management plans to advance 20+ obesity trials in FY26, including 10 Phase 3 studies and a highly differentiated potential oral formulation in Phase 2, with Pfizer targeting the first of a series of potential approvals in 2028 in what they see as a $150B market.
5) COVID-19 product revenue declined further in FY25 to $6.7B (vs. $11B in FY24) as Pfizer experienced its lowest ever COVID-19 season. Comirnaty revenue of $2.3B in 4Q declined 35% operationally, bringing FY25 revenue to $4.4B (-20% Y/Y), while Paxlovid declined 70% operationally in 4Q to just $218M, bringing FY25 revenue to $2.4B (-59% Y/Y). Management expects the COVID franchise to decline further in FY26 to ~$5B, representing just ~8.2% of total sales compared to ~57% at peak in 2022, as Pfizer continues to move past the COVID-driven era.
6) PFE continues to build out its pipeline, with $8.8B invested in BD transactions in FY25 (primarily the Metsera and 3SBIO deals), alongside 4 key approvals, 8 critical readouts, and 11 key pivotal study starts. Looking ahead, management is targeting 20 key pivotal study starts in FY26 in what they are calling a “catalyst rich” year, with adjusted R&D expense expected to increase to ~$11B at the midpoint (vs. $10.4B in FY25) as Pfizer invests to maximize post-2028 growth and strives for industry leading growth by the end of the decade.
7) Management continues to execute against its cost realignment program, exceeding 2025 targets and now on track to deliver the majority of the $7.2B in total net cost savings by end of 2026, a full year ahead of schedule, with ~$500M of those savings being reinvested to strengthen R&D productivity.
8) Management returned ~$9.8B ($1.72/share) to shareholders through the quarterly dividend in FY25, a ~6.4% annual yield at current prices. Management made clear they remain committed to maintaining and growing the dividend over the long term, while also maintaining $3.3B in remaining share repurchase authorization, though no buybacks are planned for FY26.
9) Pfizer ended FY25 with leverage slightly above 2.7x, expected to remain stable to slightly higher as the company navigates the LOE period through 2028. The planned sale of its stake in ViiV is expected to further strengthen the balance sheet, and when including the anticipated proceeds, BD capacity increases to ~$7B, providing additional firepower to further build out the pipeline.
10) Management guided FY26 revenue of $59.5B to $62.5B (-5% to flat), broadly in line with consensus. Revenue is expected to be weighed down by lower COVID sales and a $1.5B LOE headwind, which backing out implies ~4% operational growth at the midpoint. Adjusted EPS is guided to $2.80 to $3.00, representing a ~13% to ~7% decline Y/Y driven by the headwinds noted above.
Earnings Call Highlights
General Market
The CNN “Fear and Greed Index” ticked down to 29 this week from 38 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) rose to 79.29% equity exposure this week from last week’s 74.93%.
Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week. Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.
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