2023-06-22 06:02:34 ET
Summary
- Patterson Companies' shares spiked 21% after reporting strong Q4 2023 earnings, with revenue at $1.72 billion, a 5% YoY increase.
- The company's dental segment saw an 8% YoY revenue increase, while the animal health segment posted slower growth of 3.2%.
- Despite the recent share price appreciation, PDCO stock is still considered attractively priced and rated a 'buy'.
One company that is the gift that just keeps on giving is Patterson Companies ( PDCO ). For those who don't follow the company closely, it's worth mentioning that it serves as a specialty distributor in the dental supply market in both the US and Canada. On top of this, the company also has its own animal health segment. Through this, it sells a wide variety of products like vaccines, diagnostics, equipment, software, and more. For more details on its business model, I would encourage you to check out the last article that I wrote about the company.
In that article, I took a bullish approach to the business. Even though the firm had a mixed operating history over the prior few years, with sales climbing but profits and cash flows showing significant amounts of volatility, the overall picture for 2023 was looking up. I acknowledged that the company was probably not the best prospect on the market. But with those improvements and with how cheap shares were, I could not help but to rate the business a ’buy’ to reflect my view at the time that the stock should outperform the broader market for the foreseeable future. Since then, shares have spiked 21% compared to the 9.2% profit that we have seen from the S&P 500. The lion’s share of this move higher came from a 14.7% surge in price that PDCO stock experienced on June 21st.
Stellar results and a promising future
The catalyst behind the share price appreciation that Patterson Companies experienced on June 21st was the earnings release that management provided for the final quarter of the company's 2023 fiscal year. According to management, revenue for that time came in at $1.72 billion. In addition to translating to a 5% increase over the $1.64 billion that the company generated one year earlier, sales were also higher than what analysts anticipated by roughly $61.7 million. Had it not been for foreign currency fluctuations, revenue would have increased at an even more impressive rate of 5.7%.
The big mover for the company was the Dental segment of the firm. Revenue here shot up 8% year over year on a constant currency basis (or 7.4% on a reported basis), with a 19.2% surge of equipment on a constant currency basis and a 13.4% increase and value-added services, leading the way. By comparison, the Animal Health segment posted far slower growth of only 3.2%. Most of this mediocre growth was driven by a modest 2.4% rise in sales associated with consumables. By comparison, equipment sales shot up 16.7%, while value added services soared 52.6%.
Profits for the company also impressed. Earnings per share of $0.77 beat out the $0.65 per share that the company reported one year earlier and exceeded analysts’ expectations by $0.14 per share. The earnings per share reported by management translated to net profits of $75 million. That's up nicely compared to the $63.9 million the company generated in the final quarter of 2022. In addition to benefiting from the growth in revenue, Patterson Companies reported some meaningful margin expansion. The adjusted operating margin for the Dental segment, for instance, grew from about 10% to 12.1%. Over the same window of time, the adjusted operating margin for the Animal Health segment expanded from about 5% to 5.5%. Management did not provide much in the way of detail as to why this occurred.
Other profitability metrics for the company also improved. Operating cash flow, for instance, went from negative $146.9 million to negative $26.7 million. If we adjust for changes in working capital, we would see that number grow from $81.3 million to $93.9 million. And finally, EBITDA for the company jumped up from $93.4 million to $126.5 million. In the chart above, you can see that the picture for the company for the 2023 fiscal year as a whole relative to the 2022 fiscal year was not quite as pleasant. Sales actually did decrease year over year. However, all of the profitability metrics improved, with those associated with operating cash flow and EBITDA improving substantially.
I understand that some investors might view recent changes as short term in nature. However, management clearly has optimism when it comes to the 2024 fiscal year. Earnings per share should come in between $2.14 and $2.24. That compares favorably against the $2.12 reported for the 2023 fiscal year. On an adjusted basis, however, earnings per share should be between $2.45 and $2.55. Normally, I prefer the official reported earnings per share figures when looking at a company. But I also look at what the difference is between both the GAAP earnings and the non-GAAP earnings. And if I view the GAAP earnings to be impacted by items that are largely one time in nature, then I do sometimes prefer the non-GAAP ones. That does appear to be the case here, since management is baking in a $0.31 per share hit associated with deal amortization expenses for 2024.
If we take the midpoint of this range, we would get net income for next year of $244.5 million. That's a substantial increase over the $207.6 million that the company reported for 2023. Applying that same growth rate to the other profitability metrics would give us adjusted operating cash flow of $361 million and EBITDA of $423.6 million. Using these numbers, we can easily value the company.
As shown in the chart above, the stock is trading at a forward price to earnings multiple of 13. The forward price to adjusted operating cash flow multiple is 8.8, while the forward EV to EBITDA multiple should be 8.4. The chart also shows calculations using data from 2022 and 2023. For the sake of conservatism, I will rely on the 2023 figures that have just been reported as opposed to the forward estimates. Taking this data, I then compared the company to five similar firms. These can be seen in the table below. On a price to earnings basis, Patterson Companies what's cheaper than all but two of the five companies shown. Four of the five ended up being cheaper than it on a price to operating cash flow basis. But when it comes to the EV to EBITDA approach, I calculated that only one of the companies ended up being cheaper than our target.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Patterson Companies | 15.3 | 10.3 | 9.8 |
AdaptHealth ( AHCO ) | 14.9 | 3.1 | 6.5 |
Owens & Minor ( OMI ) | 13.3 | 3.6 | 10.1 |
PetIQ ( PETQ ) | 20.7 | 8.7 | 12.1 |
Henry Schein ( HSIC ) | 22.2 | 19.0 | 12.4 |
Cardinal Health ( CAH ) | 52.4 | 4.7 | 10.3 |
Takeaway
Based on all the data that I see, I do believe that Patterson Companies deserved the upside it experienced. At present, the future for the firm looks promising and shares look attractively priced, even if we use the data from the 2023 fiscal year instead of the very bullish 2024 forecast. Relative to similar firms even, the stock is cheap using two of the three valuation metrics that I employ. Add all of this together, and I have no problem keeping the company rated a ‘buy’ right now, with the understanding that the easy money has already been made.
For further details see:
Patterson Companies Keeps Getting Better