Another Cavity for Patterson

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This hasn't shaped up as a summer to remember at Patterson Companies (Nasdaq: PDCO), a distributor of dental, veterinary, and rehabilitation products. Ever since a disappointing earnings result in late May, the stock has fallen by nearly one-quarter in about one quarter's time.

Results from the company's first fiscal quarter aren't going to be creating a lot of toothy grins among investors. Sales in the period rose 3% as reported and about 9% on a comparable basis once an allowance is made for an extra week in the year-ago period. Not only was that lower than the low-end Wall Street estimate, but it was also down about 5% sequentially.

Despite the below-plan sales result, operating margin stayed level as the company offset a minor decrease in gross margin with better operating expense efficiency. Consequently, net income rose by 5% for the quarter and the company did manage to post a slight year-over-year increase in earnings per share.

Although neither the veterinary nor rehabilitation business posted blowout growth for the quarter, it appears to me that the dental business was the main issue this time around. Sales of consumables were pretty good (up 8%), but equipment sales grew only 4% for the period. While it's true that equipment sales can be volatile from quarter to quarter, it's also true that they make up the second-largest revenue line item for the company.

Unfortunately, even with the drop in the stock price, the shares aren't what I'd call cheap. While Patterson does produce free cash flow and delivers a solid return on assets, the relative valuation between Patterson and other distributors, such as Dentsply (Nasdaq: XRAY), HenrySchein (Nasdaq: HSIC), and Sybron Dental (NYSE: SYD), still seems out of whack.

I realize that the higher valuation for Patterson is a by-product of the higher growth expectations, but with two consecutive disappointments, I'd still be a bit concerned about valuation. Patterson has a collection of high-potential businesses, but Wall Street rewards undelivered potential for only so long.

For more healthful Takes:

• Possis' Possible Pitfalls
• Intuitive Surges Into the Future
• STERIS Still Looks Sickly
• Patterson Gets Drilled

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).