Patterson Dental Supply is looking at a slowdown
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Dear Mr. Berko:
My father-in-law has been a dentist for 33 years, and in October 2007 recommended that I buy 300 shares of Patterson Dental Supply at $38. I did, and it’s never been that high since. Last year, he strongly recommended that I buy another 300 shares at $32, and I now have 600 shares and am down $7,800. Last week he again told me that I “must” buy 300 more shares because the stock is selling at $21. I said to him that it doesn’t make sense to buy more Patterson unless its sales and net income per share increase at a much faster rate. He said I shouldn’t worry about that, because he has a patient at the company who told him business was “going to be fantastic” and that “the stock is cheap at $21-$23,” and this patient thinks Patterson will go back to the $50s. My father-in-law gets kind of out of sorts when I disagree with him, so I bought another 300 shares at $22, and I now have 900 shares. Am I making a mistake? Should I sell my shares and take my losses, or does Patterson have good potential over the next two to three years? We use the same broker, so my father-in-law knows if I buy or sell the stock.
L.E., Wilmington, N.C.
Dear L.E.:
I would like to ask you four questions: (1) Does your father-in-law dislike you? (2) Are you “rooster” pecked? (3) Is your wife the household boss? (4) Do you think it’s OK for your broker to discuss your account with your father-in-law?
Patterson Cos. Inc. (PDCO-$25.01) is the second-largest supplier of dental consumables and supplies in the nation. PDCO provides dentists with crowns, amalgams, adhesives, curing lights, X-ray films, mounts, solutions, instruments, denture products, anesthetics, needles, bleaching, aspirating and impression materials, cements and cosmetic applications, to name a few frequently used products. In fact, PDCO products serve 33 percent of the nation’s dental market.
I expect that PDCO, as well as Henry Schein Inc. (HSIC-$50.80), with 37 percent of the market, can count on a slowdown in revenues. The Kaiser Foundation recently completed a survey of 1,300 respondents and discovered that 35 percent of them were going to delay their dental care because of the costs. Dental care is a discretionary expense. So with unemployment certain to exceed 10 percent and with consumers more heavily in debt than any time in human history, it’s a no-brainer to conclude that many consumers will be postponing their dental care for a few years.
However, PDCO’s veterinary supply business (15 percent of revenues) has demonstrated exceptional performance, and sales to veterinary clinics continue to improve each year. Patterson expects revenues from the sale of vaccines and injectables, nutraceuticals, antibiotics, ointments, wound dressings, sutures, surgical instruments, lab supplies, testing products, etc., to exceed $550 million this year and grow at a faster rate than its dental supply products did in their good years.
PDCO is a very well-managed company. Its net profit margin of 6.8 percent and operating margin of 12.7 percent are 50 percent better than its largest competitor, Henry Schein. Earnings have increased every year since 1998, and book value also has grown in each of the last 19 years. PDCO has a clean income statement and balance sheet, and management, plus insiders, owns a whopping 23 percent of the outstanding stock. I like the company, which began business in St. Paul, Minn., 132 years ago, but not at its current market price. Stop listening to your father-in-law — that is, if you have the stones to do it. Then sell 600 of your shares for a tax loss (keep the 300 shares at $22) and place an open order to buy 600 shares at $18, which is seven points below the current price but three points above its recent low price. And when you finally buy the stock, hold it for about three to four years, because I think PDCO could trade in the high $30s by 2012, potentially doubling your money.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2009 Creators.Com
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