Absence doesn't always make the heart grow fonder. It's been a little while since I've checked up on dental and veterinary supply distributor Patterson
Sales rose 11% this quarter, with 8% growth on an organic basis. The company managed to hold the line on margins and operating income growth came in at 11%. Free cash flow took a noticeable dip, though, and inventory was a fair bit higher this time around. It should be noted, though, that management attributed at least some of that rise in inventory to a relatively recent acquisition.
I'll come right out and say it: I don't like this stock much. First of all, there's not a lot of growth in the business (dental sales were up 7% on an organic basis) and there's plenty of competition from the likes of Henry Schein
What's more aggravating is having to pay this multiple for the business. Even giving the company the benefit of the doubt on margin improvements (which I find questionable), I don't come close to thinking that this stock is cheap. And to be blunt, if I'm going to overpay for a health care/med-tech business, I'd rather overpay for something like Intuitive Surgical
Now, it's certainly true that valuation isn't a company's fault, nor is it something management should spend any time worrying about. But until I see better free cash flow performance, improving returns on capital, and so on, I just don't see a reason to jump aboard this bus. Maybe they will turn it around, but with so many other stocks that look good today, why wait around?
For more Foolish thoughts on the dental market:
Intuitive Surgical is a Rule Breakers pick. Looking for the next great tech innovator? OurMotley Fool Rule Breakersnewsletter can lead the way. And now you can take the swashbuckling newsletter dedicated to up-and-coming companies in emerging fields for a30-day free spin.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
