Envista has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 18.7% to $20.15 per share while the index has gained 19.8%.
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Why Do We Think Envista Will Underperform?
We're sitting this one out for now. Here are three reasons there are better opportunities than NVST and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
We can better understand Dental Equipment & Technology companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Envista’s control and are not indicative of underlying demand.
Over the last two years, Envista’s constant currency revenue averaged 1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Envista’s five-year average ROIC was negative 3.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Envista’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Envista doesn’t pass our quality test. That said, the stock currently trades at 16.5× forward P/E (or $20.15 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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