Patterson Dental Company
Patterson Dental's primary business is the "consumable dental supplies" that dental offices go through like water: X-ray films, hand instruments, sterilization products, and those scary looking dental instruments. It's an extremely specialized business, and its common equipment needs differ from those in other medical fields. As such, a company such as Patterson, which only focuses on dentistry supply, can create a pretty good franchise for itself.
Such is the case here, as Patterson's growth, even excluding its acquisition of J. A. Webster and its veterinary supply business, has been robust, and its gross margins have consistently remained at about 6% to 7%. This past quarter was no different. In fact, the biggest concern was its rapid and sudden increase in receivables, which was inordinate with revenue growth, pointing to a longer cash-conversion cycle.
Some of this could be explained by the acquisition, but we'd like to see greater improvement. We would also rather the company didn't buy back a high number of shares (247,000) this year with its stock price so high. Patterson's stated reason was to alleviate the dilutive effects of the J.A. Webster transaction. Yet several directors and executives were selling significant chunks of stock, so the company clearly didn't buy its stock back because it was undervalued.
Patterson Dental's stock remains expensive, with multiples of free cash flow exceeding 41, meaning that the company is going to have to show good, consistent growth for some time in order to meet these assumptions.