Like Laurence Olivier's character in Marathon Man, investors in dental, veterinary, and rehab supplier Patterson (NASDAQ:PDCO) may well be wondering, "Is it safe?" After all, this has been a tough year, and management guidance doesn't suggest that an immediate turnaround is in the offing.
Taking some of the sting out of today's report is that the company preannounced bad results for this second quarter and took the pounding in the stock price last week. Sales were up 11% as reported and up about 7% without acquisitions as sluggish performance in the dental equipment business hurt results. Margins also softened a bit, and the company realized net income growth of just 5%.
Dental equipment has been the problem child here before, and while that business can be volatile on a quarter-to-quarter basis, it does seem as though the company is suffering for focusing its attentions on high-technology equipment to the detriment of more basic items like chairs and lights. Not helping matters, Danaher (NYSE:DHR) has seen some softness in parts of the dental business, and rival distributor Henry Schein (NASDAQ:HSIC) is hard at work building a more global platform.
Now, I do think there is still ample opportunity to grow within the dental distribution market, to say nothing of the veterinary distribution business. But I also think that growth estimates for this company have gotten a bit inflated. That could mean more hard times for the stock should the company underperform, causing investors to adjust their valuation multiples accordingly. What's more, this marks three consecutive sizable disappointments from this company, so I'd be a bit more suspicious about how well the analysts really have this business pegged.
Looking at a cash flow-based valuation, I have no interest in this stock. After all, do you want to pay more than 25 times earnings for a company that may be hard-pressed to achieve mid-teens growth? Though the same could be said for Dentsply (NASDAQ:XRAY) and Sybron (NYSE:SYD) to some extent, at least those two businesses don't have a recent track record of disappointment.
For more toothy Takes:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
