David Blood and Al Gore’s Generation Owns 5.1% of Henry Schein, Inc. (HSIC)

David Blood, the former head of Goldman Sachs Asset Management, and former Vice President Al Gore co-founded Generation Investment Management in 2004. The fund recently filed a 13G with the SEC to disclose ownership of 4.4 million shares of Henry Schein, Inc. (NASDAQ:HSIC), an $8.9 billion market cap medical equipment company, or 5.1% of the total shares outstanding. We track quarterly 13F filings from hundreds of hedge funds, including Generation, as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can see from our database that Generation had owned 4.2 million shares of Henry Schein, Inc. (NASDAQ:HSIC) at the end of March. Check out Generation’s stock picks. At that time the stock was its largest holding by market value, so while only a small number of shares have been bought since that time it’s interesting that Generation would add to its largest position.

In the first quarter of 2013, Henry Schein, Inc. (NASDAQ:HSIC)’s revenue grew by 9% versus a year earlier. The animal health business, which accounted for 28% of total sales, was the fastest-growing of the company’s segments and helped make up for only 3% growth in the dental division (the largest of Henry Schein, Inc. (NASDAQ:HSIC)’s segments, at just over half of revenue). With expenses rising as well, however, there was little change in the company’s pretax income after adding back some restructuring charges to the Q1 2012 numbers.

The financial community, however, is quite bullish on Henry Schein, Inc. (NASDAQ:HSIC): at its current valuation, the stock trades at 22 times trailing earnings. Even if the company was holding its margins steady, and therefore growing net income at the same rate as revenue, it would be difficult to call it undervalued at that price; given the fact that costs seem to outpacing sales, to the point that pretax profits have been rising only modestly, the stock does not look like a good value. Wall Street analysts expect little earnings growth at least in the near term, with their forecasts implying a forward P/E of 19. In addition to Generation’s involvement, billionaire Ken Fisher’s Fisher Asset Management reported a position of 590,000 shares in its own 13F (find Fisher’s favorite stocks). D.E. Shaw, a hedge fund managed by billionaire David Shaw, more than doubled its own holdings in Henry Schein, Inc. (NASDAQ:HSIC) to a total of about 320,000 shares (see more stocks D.E. Shaw owned).

Other companies which sell and distribute medical equipment include Patterson Companies, Inc. (NASDAQ:PDCO), Owens & Minor, Inc. (NYSE:OMI), MWI Veterinary Supply, Inc. (NASDAQ:MWIV), and McKesson Corporation (NYSE:MCK). This peer group is characterized by high earnings multiples as well, as markets look for high growth. MWI Veterinary Supply, Inc. (NASDAQ:MWIV) is valued at 28 times trailing earnings, though it did report double-digit growth rates on both top and bottom lines in its most recent quarter compared to the same period in the previous year. We’d also noted in our look at Henry Schein that its animal health unit was a strong point, so MWI does merit something of a premium to these other companies in our view.

The other three peers we listed carry trailing P/Es in the 20-21 range, roughly in line with where Henry Schein, Inc. (NASDAQ:HSIC) trades. McKesson Corporation (NYSE:MCK) experienced a steep decline in its earnings in fiscal Q4 (which ended in March) from levels a year earlier, but the sell-side apparently expects the company to recover and as a result it’s priced at only 13 times forward earnings estimates. Patterson Companies, Inc. (NASDAQ:PDCO) and Owens & Minor, Inc. (NYSE:OMI) have both been seeing very light revenue growth, so as with Henry Schein we wouldn’t count them on growing fast enough going forward to justify their current valuations.

The industry as a whole seems to be pricing in quite aggressive growth compared to recent results. McKesson Corporation (NYSE:MCK) is the only company here which could qualify as a value, and even then it would be because of optimistic analyst projections; with the business struggling recently, we’d avoid it. MWI Veterinary Supply, Inc. (NASDAQ:MWIV) has been growing nicely, as we’ve seen, and might be worth looking into if it can continue that trend for another quarter or so, but at this point its earnings multiple would keep us from buying as well.

Disclosure: I own no shares of any stocks mentioned in this article.