I heartily recommend that every investor print out a strip of paper with the words "Margin of Safety" and tape it on or above their computer monitor. Time and time again, the market shows that paying too much for a stock can turn a slight disappointment into a big loss.
Sales in the fourth quarter climbed 17% (10% internal growth) but just barely missed analysts' expectations. However, higher expenses led to soft margins, and the company posted only 11% net income growth. On an earnings-per-share basis, the company reported $0.36 -- up 10% from the prior year, but a full $0.03 shy of analyst expectations.
There weren't any major surprises in the earnings release, and I'd recommend that interested readers review it for themselves. While the company's smaller veterinary and rehabilitation-equipment businesses posted strong growth -- 54% and 31%, respectively -- the much-larger dental business (about 75% of total sales) was up 10% for the quarter.
I'm not too dismayed by this bad quarter, but I am concerned about management's commitment to return capital to shareholders. Though its board approved a share buyback in September of 2004, Patterson hasn't made any repurchases yet. While this isn't too rare -- companies often announce bold buybacks but don't follow through -- it's a big reason why I prefer dividends to buybacks. Once a dividend is declared, you can basically rest assured that you'll get your money.
Even with today's haircut, the stock doesn't exactly look like a screaming bargain. I fully appreciate that Patterson cannot be compared with competitors like Dentsply
I actually do like Patterson's prospects, but only at the right price. I see a lot of growth potential in the veterinary and rehabilitation business and a lot of cash-flow potential in the dental business. Ask yourself: Do you really want to pay up to get into this stock?
Learning about health-care stocks isn't like pulling teeth:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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