Patterson Companies, Inc. (NASDAQ:PDCO) : Let Me Count the Ways
Okay a little bit over the top, but I’ve got a lot more buying interest in stocks like Patterson Companies Inc (NASDAQ:PDCO) and Henry Schein, Inc. (NASDAQ:HSIC) than I do in hot stocks that are being bid up just because they are in industries that the media likes to endlessly cover. In order to try to redress this imbalance, I’m going to make a few bullet points on why Patterson Companies, Inc. (NASDAQ:PDCO) is attractive:
Dental and veterinary products distribution is highly fragmented in the US and there is the need and potential for consolidation, which could improve margins down the line.
Demographics (an aging population) favor increased dental provision and expansion in the numbers of companion animals.
Social trends (singles, single parent families) increase the attractiveness of companion animals.
Technological advancements from companies like Sirona Dental Systems, Inc. (NASDAQ:SIRO) and IDEXX Laboratories, Inc. (NASDAQ:IDXX) will drive growth in spending. Both are key partners of Patterson Companies, Inc. (NASDAQ:PDCO).
End demand is slightly cyclical but holds up well in downturns.
Highly cash generative: Patterson has generated over 25% of its current enterprise value in free cash flow over the last five (recession affected) years.
GDP+ type growth
Patterson has many of the qualities that investors might look for in order to provide balance to a portfolio. The downside appears to be relatively limited, but it appears to have some upside drivers coming from structural and strategic developments.
With that said, investors need to appreciate that end demand is somewhat dependent upon cyclical factors. A breakdown of its constituent segments demonstrates its resilience but also its partial reliance on the economy.
The impressive performance of its veterinary operations (formerly Webster but now branded as Patterson) is in line with the industry. I can’t help but think there are some M&A opportunities here. Henry Schein, Inc. (NASDAQ:HSIC) also has a substantive veterinary operations, and MWI Veterinary Supply, Inc. (NASDAQ:MWIV) has been generating double digit revenue growth in the last few years; more of the same is expected in the future. Moreover, IDEXX Laboratories, Inc. (NASDAQ:IDXX) (a partner of both HSIC and PDCO) is expected to accelerate consumables sales in the future. I’ve discussed Idexx in more length in an article linked here. The key point to understand here is that Idexx is in a phase of pushing system sales in order to increase consumables sales in the future. This will benefit IDEXX Laboratories, Inc. (NASDAQ:IDXX) and its distributors.
As for the dental side, it has expanded its key relationship with Sirona following some product unavailability in the last quarter. I discussed this matter in a previous article on PDCO. The good news is that this issue has been rectified, and PDCO’s management affirmed that there is strong pent up demand for Sirona’s proprietary technology. This is good news at a time of ongoing sluggishness in core equipment sales to dentists. The consumables market may be stable for Patterson, but demand for things like chairs, lighting, cabinets etc remains weak. I think part of this is due to macroeconomic concerns (dentists reluctant to spend) and a tendency for them to want to allocate spending dollars to solutions like Sirona’s CAD/CAM system. More discussion on Sirona linked here.
