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Why the 2 Main Dental Supply Companies Just Tanked

By Chris Hill and Bill Barker - Feb 14, 2018 at 9:00PM

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Antitrust allegations are sending shares of Patterson and Henry Schein down in a big way, and trouble for these companies doesn’t end there.

In this episode of Market Foolery, host Chris Hill talks with contributor Bill Barker from Motley Fool Asset Management about some of the biggest headlines in the market today. Under Armour (UA 2.74%) (UAA 2.48%) rose 17% on its first good news in a while -- strong sales everywhere, except North America. AmerisourceBergen (ABC 0.68%) popped on reports that Walgreens Boots Alliance (WBA 1.56%) is in talks to acquire an even larger stake of the wholesale drug company. Dental-supply companies Patterson (PDCO 1.33%) and Henry Schein (HSIC 0.40%) fell after the FTC came knocking with antitrust violation allegations -- is now a good time for long-term investors to hop in? And finally, L.L. Bean canned its famous lifetime guarantee policy, much to the dismay of its customer base. Tune in to find out more.

A full transcript follows the video.

This video was recorded on Feb. 13, 2018.

Chris Hill: It's Tuesday, Feb. 13. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Happy Valentine's Day Eve!

Bill Barker: Thank you!

Hill: Like me, I'm assuming you've done absolutely nothing in preparation for tomorrow.

Barker: I've thought about it, so I've done more than you.

Hill: Touche!

Barker: This is your first point. Like, "Oh, I've said the word Valentine's Day." That was the beginning of your thinking about it, right here.

Hill: Pretty much, yeah. Plus, just before we started taping, you and I and producer Dan Boyd, we did a good, solid 15 minutes on the Winter Olympics, and we got that out of the way, so we can get to actual business news today.

Barker: We're on topic today.

Hill: We're on topic.

Barker: If you came listening for tangents ...

Hill: I'm sorry.

Barker: ... turn around. We're done with them.

Hill: We're all business today. We're going to get into a very interesting story, I promise you, involving dental supply companies. Just trust me. Just trust me on this one. We have to start, though, with Under Armour, which apparently is still alive as a public company. Fourth quarter revenue for Under Armour looked really strong outside of this continent. North America, not so great. The rest of the planet looked strong enough that shares of Under Armour were up 17% this morning.

Barker: Yeah. And I think when you're looking at the one-day stock movement, you have to ask, a 5% increase in sales, which I think was the total across everything, translating into a 17%-18% stock price move. Really, what's going on there? This is a heavily shorted stock, and I think you're seeing a lot of short covering as part of that. But, it was the first good news of any stripe that the company has really produced in a quarterly fashion for a long time.

Hill: When you look at the comments from company management -- and maybe it's the fact that Under Armour, as you said, really, it's been two years or so that this company has had anything to celebrate -- do you get the sense that Kevin Plank is ... what's the word I want to use here, chastened? Do you think he's chastened enough? Do you think that the results of the stock and the business have been so bad for so long that he looks around and says, "You know what? We just have to stick to our knitting, we have to put aside any thoughts of anything other than just delivery, delivery, delivery?"

Barker: Well, I don't know what's in his head, but I think that humility is something that the market wants to see, rather than aggression. I think the pursuit of growth and the self-assurance that the company would achieve this growth has been its undoing. And I think the bottom line has become much more important than the top line for this company. And it has to continue, maybe it has started to, rationalize some of its cost structure, but I think it has a long way to go on that. It can produce a lot of returns for shareholders, if it were to approximate its competitors, in terms of efficiency. It's not there. It has hopefully bottomed out, in terms of the margin pressure. But I think, as you indicate, whether he is chastened or not, I couldn't speculate on, but I think he needs to be to recognize that it's not all about growth, it's about profits.

Hill: Last thing before we move on, Adidas is a company based outside the United States that has done a very good job, I would say, particularly over the last five years, of making significant inroads into North America in terms of sales. Obviously, Under Armour wants to do well in North America. Obviously, they're not happy with the fact that sales dropped year over year in terms of their Q4 results. That being said, can they make inroads? Can they essentially follow the reverse playbook of Adidas? And if they can get things right in North America, is that one of the key drivers of growth for them, is international sales?

Barker: Well, international growth was 47%, and that's a number that you're going to be paying attention to if you're an investor, if you're management, if you're anybody. 47% growth, something's going right there. And it's a big market. The rest of the world turns out to be a big market. And certainly, the bulk of its sales are in North America, and off 4% for the quarter is a problem, but a problem that feels addressable. 4% is a manageable number. And obviously, it doesn't have the same traction in terms of its brand power abroad that it has here. I don't know, in your case, is your son wearing Under Armour all the time?

Hill: A decent amount. But he has no brand loyalty. He's a 12-year-old boy. [laughs] 

Barker: I know, but they're driving the purchasing decision, they're going, when they're taken out to get clothes, he has some input. If everybody in his grade is wearing Under Armour all the time, which I think at least was the case, and just from eyeball experience in my own house, I would say that I see less Under Armour on my son than I used to. And I don't know if that's because he's been given other clothes by mom, that she's directed that in some fashion, or whether it's a little less of the uniform today than it was a couple of years ago.

Hill: Let's move on to a company that's definitely not a household name -- AmerisourceBergen. Let's do that again. AmerisourceBergen is the name of the company. It's a drug distributor. Walgreens owns about 26% of this company. And it turns out that Walgreens is at least mildly interested in owning more of it, because Walgreens has initiated talks to either acquire a majority stake or maybe the whole thing outright. And shares of AmerisourceBergen are up today pretty significantly, 10% at one point that I saw this morning. Walgreens seems like a company that has a lot of irons in a lot of fires. So, with respect to this particular fire, when you look at this move, do you think this makes sense for Walgreens?

Barker: Yeah. I think it's not that much of a strategic move. AmerisourceBergen already provides all the drugs. I think they're the sole supplier for Walgreens. So, they already have a great working relationship that has been effective and they're happy with. So now, it's talking about cost efficiencies and giving more vertical integration. You see this occurring in a number of ways. Behind every story nowadays lies Amazon, and that's true in this case. Amazon's inroads into talking about getting into the pharmacy space, into its strategic proposed alliance with Berkshire and JPMorgan, there's a complex chess game going on, and this is one of the ways that Walgreens -- reportedly, we don't really know, it's reported by The Wall Street Journal so I think we can have a reasonable amount of confidence that these talks are going on, but this is not something the company is putting out there. So, I think that's part defense, but also, it can operate more efficiently together than apart.

Hill: In the case of Walgreens, they're not just playing defense against Amazon, they're also playing against CVS.

Barker: Yes. CVS, in the proposed merger with Aetna, that's a little bit different. The supply chain in the pharmacy market with pharmacy benefit managers and the wholesalers and the hospitals and the insurers, a lot of different ways that you can combine these things to get more efficient. CVS is getting put back into the pharmacy benefit managing space. There are a lot of different things you can do, and this is one of the ones that Walgreens looks like it's interested in, and it seems to make economic sense, in that I think there's maybe $500 million or so in synergies that you can produce, or at least, that's some of the reporting or analysis that I've read. That's real money.

Hill: Wouldn't it'd be great if just once, a large company acquired another company and just said from the outset, "There are no synergies here, we just want this." "How much do you think you're going to save in synergies?" "Nothing, absolutely nothing.' Just once, I would love that to happen. Like, "No, we just wanted to buy this thing."

Barker: "Negative. The whole thing is getting more expensive, but more fun." That is what, in empire building, happens a lot.

Hill: Lack of synergies?

Barker: Lack of synergies, companies that just want to get bigger, rather than get bigger for the right reasons, which is to reward shareholders. But if you're getting bigger to reward management, if management's incentives are based on the amount of revenues as an absolute figure rather than revenues per share or what the ultimate profits are going to be, that's driven lots and lots and lots of acquisitions. Think of when Sony was owned by Coke, or Columbia Pictures.

Hill: Yeah, Coca-Cola owned a movie studio, because of course.

Barker: Let's go back and review what they said about the synergies available from that combination. Well, you go to the movie theater, now maybe you can order some Coke, whereas before, there was no way to get Coke at a movie theater. Not that the theaters are actually the entity, because it's the movies being shown at the theaters. But I guess, product placement? Maybe that was the thing. I don't know, what were the synergies there?

Hill: That was probably it, that was probably the full extent of it. Two companies I've never heard of before today: Patterson and Henry Schein. These are both dental supply companies, and the Federal Trade Commission has accused them of violating antitrust laws. Actually, the two of them and a third company called Benco Dental Supply, which is a private company. If Benco were a public company like Patterson and Henry Schein, its stock would be dropping today like both of those are. The FTC has accused these companies of conspiring to -- any time Uncle Sam comes in with some version of the word "conspire," I'm reading that story, I'm interested, you've got me. You had me at conspire. Conspiring to refuse discounts to dentist buying groups. I don't know about Patterson, I saw Henry Schein came out and issued a statement vehemently denying these charges. But investors, at least today, are siding with the FTC, or at least saying, "I don't think I want any part of this," because both stocks are down pretty big today.

Barker: Yeah, it's been a bad series, the last six months or so, for the dental suppliers. Of course, Amazon is part of their story. Amazon getting into the space, reputedly, in a bigger way, to supply some of the smaller parts of the dental supply business. But, I'm surprised that you've never heard of Patterson. Let me just say, the next time you're in a dentist's office, you will probably notice that there's Patterson branding and equipment all over the place, because they are huge in that market, and it's just littered with their products. The smaller dentists want to be able to group together and use buying power as a combined entity and get some better prices. And the allegation here, the accusation, is that they have conversations between members of these companies agreeing not to participate in this, not to cut their prices to supply suppliers with lower prices so that they can then help out the smaller dental operations.

Hill: And these three companies, just for the sake of context, control somewhere in the neighborhood of 85% of the total market. Which, of course, is one more reason that Amazon would want to get in on that.

Barker: Yeah. Amazon, again, has already got some space here. There's a lot of room for them to grow, obviously, if 85% of the market is controlled by these other entities. Usually, you make money by betting on Amazon and against Amazon's roadkill. So, I don't know that there's a direct line in this case, but I think Amazon is in the shadows.

Hill: But in terms of -- we talk about investing in market leaders all the time, regardless of industry. These are the market leaders. Henry Schein, that stock is hitting a four-year low today. Patterson, that stock is hitting a nine-year low. So, if you step back and think, "OK, I get that Amazon has the capacity to move into this market, they're not going to do it overnight, and they're not going to do it in the next 12 months." So, when you look at these two stocks trading at multi-year lows, do you think this might be a buy on the dip situation?

Barker: I've been watching Patterson for a while, it's been on a watch list, and you keep looking at the past and saying, "Well, if the future looks a little bit like the past, this thing is getting awfully cheap." And I have to say, I haven't been able to move from that conclusion for a while. And the future just does not look as rosy as the past. Compounding out, previous growth rates has gotten you investors to the wrong place with Patterson for a while. I can't comment as much on Henry Schein, but it's really a pretty similar operation. They're used to doing business in a certain way, and that way is changing. And whether they can compete, the federal government is alleging that one of their ways of trying to compete is illegal. And they'll have their day in court. There's a day scheduled for October. And in between now and then -- there's no fine that's being pursued, I believe, at the moment. Just, they stop this practice. So, we'll see whether there's an agreement that's reached before they actually get into court.

Hill: Did you want to talk about L.L. Bean? Or no?

Barker: No, you wanted to talk about L.L. Bean.

Hill: No, you were emailing me last week about it.

Barker: You already knew everything about it. You had already probably gotten 18 tweets about it from Mainenet or whatever your user group is.

Hill: We'll get to that in a second. First, a quick story from San Francisco. I think longtime listeners in particular -- and when I say longtime, I mean really longtime listeners -- will appreciate this story. I mentioned we had this great meet up in San Francisco with podcast listeners. We had about 30 or 35 people show up, it was wonderful. And by the way, we're going back to South by Southwest this year. In March, we're going to be doing a meetup in Austin, Texas. And we're already talking about doing a listener meet up here in the D.C. area later this spring as well. So, more details to come on both of those. Anyway. We started podcasting here at The Motley Fool in 2009. And in the spring of 2009, one of the biggest public companies, Cisco Systems, announced an acquisition. And Cisco Systems, like a lot of big tech companies not named Apple, has done lots of acquisitions over the years. This was kind of eye-opening, because this was Cisco Systems buying Flip Cam. Do you remember this? The Flip camera?

Barker: Sure.

Hill: Which they bought for $600 million. And it just seemed among the more baffling -- look, Cisco is sitting on piles and piles of cash, so they have the money. But just from a business standpoint, this was one that we talked about repeatedly on Motley Fool Money, and, again, on Market Foolery. And it would come up years later as an example of companies making acquisitions, and it, in some ways, become the go-to quick thumbnail sketch example of, "Do we think this acquisition is going to pay off for this company? Or is this going to be like Cisco Systems buying Flip Cam?" Because they paid $600 million, and then two years later, they shut the whole thing down and wrote it off. 

So, fast-forward to last week, we're at the listener meet up, and a guy comes up to me, and he's holding a small paper bag, and introduces himself, and he says, "I have a present for you." And I'm like, "Oh, that's wonderful." And he takes -- and I'm holding it now, which of course no one can see, but I'll tweet out a picture of this -- he hands me a Flip Cam, a Flip Video, with the Cisco logo on it. And he says, "I've been a listener pretty much since you guys started, and I wanted to give you this, because I used to work at Cisco Systems, and I was the guy who did this deal." And for a split second, I thought he was going to take a swing at me. Because I thought, "Oh, my god, are you going to hit me with this?" No, he couldn't have been nicer. But, it was just amazing. And he went into and provided -- by the way, he provided some background on why they did the deal that, when he provided that context, I thought, one, that makes sense, and I get how this could potentially fit into a larger strategy, and two, I don't ever recall John Chambers, the CEO, providing that level of context. Because if he had, I might not have been so rough on them.

Barker: Well, it was probably less something that John Chambers was focused on, in terms of the size of the issues that he was dealing with, I suppose, to go into that detail.

Hill: It's possible.

Barker: Are you going to use that?

Hill: I think I have to. I think I want to at least give it a shot. But, yeah, I'm not great with the technology. But it seems like it's an easy device to use.

Barker: Hand it to your kids, let them figure it out.

Hill: There you go, even better. So, last week, L.L. Bean, one of the most beloved private companies in America, many people are saying this --

Barker: It's no Wawa.

Hill: [laughs] It's on the shortlist, probably. No, L.L. Bean made headlines because they changed a long-standing policy which had to do with bringing back their product, in particular their signature L.L. Bean boots. And the policy was lifetime guarantee. "Hey, we stand by these boots. If they're defective, if you have a problem with them, bring them back and we'll fix it or replace it." And not surprisingly, over the last five to 10 years, a small number of people just abused the hell out of that policy. So, L.L. Bean said, "We're changing this." Because people would wear these boots for decades and then, when they're completely worn out, they would come back and say, "Hey, I bought these in 1974, and now they're all beat up, so I'd like a new pair." Good on L.L. Bean for saying, "We're going to change this policy."

Barker: I just ran a search, and the third headline that comes up from my search is "L.L. Bean Ended Its Lifetime Guarantee Because a Few Jerks Ruined It." Which I think is the whole story.

Hill: It's absolutely the whole story. And I have to credit our colleague, Mark Brooks, who tweeted out this story last week, and included, yes, this is about L.L. Bean, but, if you are involved in any business that deals with customers of any size or stripe, and I'll just quote Mark from his tweet, "Fire abusive customers. If you are changing policies that make you wildly popular with your core to account for your fringe, you're doing it wrong."

Barker: Yeah. If I can promote, not really arrival podcast, just another podcast, This American Life did a great segment on the L.L. Bean return policy a couple of years ago on an episode called "Get Your Money's Worth." As all their episodes are, it's a great one. If you're more interested in that, you can hear 20 minutes on it. You don't want to hear 20 minutes on that from us.

Hill: Not from us, no. Send me the link to that and I'll put that out on the Market Foolery feed. Because, you know what This American Life needs? More promotion.

Barker: More listeners.

Hill: [laughs] More listeners. It's the most listened to podcast, but you know what? We'll help them out with a couple more.

Barker: While we're on the topic of obscure Maine companies --

Hill: We're done with business now, right? Are we done with business?

Barker: Sort of. I mean, L.L. Bean is a business.

Hill: That's true.

Barker: Moxie is one of these things that is unknown to the rest of the country but is apparently required that all main residents use. Can you tell me something about this?

Hill: Moxie is a beverage that I think only people in the state of Maine drink, because why anyone outside of the state would -- look, there are plenty of reasons to go to Maine, to visit Maine. There are plenty of things about Maine that are highly enjoyable. Moxie is one of those things that rightfully, residents of the other 49 states -- and for that matter, every other country on the planet -- look at people from Maine and say, "What is that?" The way I always describe Moxie is, Moxie is like Coca-Cola if you removed any sort of sweetness from it. It's a slightly bitter carbonated non-alcoholic beverage.

Barker: Does it taste like medicine? Because it originally was marketed as medicine. And the reason why somebody might drink it is, if the original claims for it were true, because its creator stated, and I'm taking this from the Wikipedia page, that it was especially effective against the paralysis, softening of the brain, nervousness and insomnia. I mean, for a soda, that's pretty comprehensive work that it can do.

Hill: That's true. I don't know that it does any of those things. I don't think it helps with regard to any of those things. The only way it helps is, if somewhere, you want to be able to say, "Yeah, I've tried that." If you're someone who has a culinary bucket list and you're just looking to check things off, like, "Yes, I've eaten that. Yes, I drank that before," yeah, sure, you can get your hands on a bottle of Moxie and have a couple of sips of that. But it's not going to taste good.

Barker: Citizens of Maine, Chris is ready to take your angry email about how the beloved Moxie is delicious, and it's just unfortunate that you can't get it anywhere else in the country.

Hill: I don't know anyone ... maybe there are people in Maine, but I don't know anyone who looks at Moxie and says, "No, it tastes great."

Barker: What, do you drink it out of spite?

Hill: I don't know, it's just because you're used to it.

Barker: It's part of your culture? You have to? It's like lutefisk or something?

Hill: What's lutefisk?

Barker: Lutefisk, isn't that what they supposedly eat in Minnesota and Wisconsin, and it's some sort of regional thing that doesn't travel at all, it's like dried fish, or, I don't know.

Hill: Maybe. We'll get some of those folks together with people from Maine, and that's your meal right there, some lutefisk, and wash it down with a nice warm bottle of Moxie.

Barker: Sure!

Hill: You can read more from Bill Barker and his colleagues, not about Moxie and not about lutefisk, but about actual investing stuff. You can go to to hear more from Bill Barker, Bryan Hinmon, the whole crew at Motley Fool Asset Management.

Barker: Lutefisk is a gelatinous thing made from fish.

Hill: [laughs] Boy. It's almost hard to believe you didn't get that salesman job. Thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

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Stocks Mentioned

Under Armour, Inc. Stock Quote
Under Armour, Inc.
$10.34 (2.48%) $0.25
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$43.71 (1.56%) $0.67, Inc. Stock Quote, Inc.
$2,302.93 (3.66%) $81.38
AmerisourceBergen Corporation Stock Quote
AmerisourceBergen Corporation
$156.86 (0.68%) $1.06
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$64.68 (0.59%) $0.38
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$45.62 (1.40%) $0.63
Henry Schein, Inc. Stock Quote
Henry Schein, Inc.
$85.96 (0.40%) $0.34
Patterson Companies, Inc. Stock Quote
Patterson Companies, Inc.
$31.87 (1.33%) $0.42
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$9.38 (2.74%) $0.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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