Patterson Lowers Estimate

Last week, I had a rambling post on Patterson Companies (PDCO). I was concerned that the company’s long run of consistent earnings growth had come to an end. Today, the company lowered guidance for this quarter and the entire year. The stock is currently down about 17%. So I guess we have an answer.
Few companies truly have a short-term earnings glitch. One earnings miss tends to give birth to several more. This is why I don’t consider myself to be a value investor. It’s also why I’m skeptical of turnaround stocks like Hewlett-Packard (HPQ).
I’m definitely on the side of Hewlett-Packard, but too often what appears to be a turnaround is really a company displacing its problems instead of fixing them. I get annoyed when the financial media falls for easy story lines (i.e., everything is wrong at Dell, HP is back). It’s much harder to get a company to change its way and truly become more efficient.
Another issue is that the power of management is overrated. Despite the proliferation of management studies, and the recent passing of Peter Drucker, management isn’t always the key to a turnaround. The market environment usually has a much greater influence. It’s very difficult to admit that time and chance happens to us all. It’s easier for the media to focus on the personalities on the stage.
From what I’ve seen of Mark Hurd, he seems to be doing a fine job so far, but HP isn’t back just yet. Last week, I predicted that Hewlett-Packard would top Wall Street’s estimates, and that was one of the easiest calls of the year. (I have to say that I was impressed by Richard Chu, the analyst at SG Cowen. He was quoted in Reuters, the New York Times and Bloomberg. That’s an analyst triple play, plus it exceeded consensus expectations.)
Let’s put the HP story in perspective. The company had a “restructuring charge” of over $1 billion. They’re also increasing the job cuts. As he Hurd it: “On July 19, we had a model. As we discussed then, we had to operationalize the model, and 14,500 moved to 15,300.” By “operationalize the model,” he means to say that it’s call Carly’s fault. And let’s fact it—it is. But how long can he keep that up?
The only good part of the layoffs is the high comedy coming out of Europe, by which I mean France. About 5,900 of the job cuts are happening in Europe and 1,240 are in France. Jacques Chirac blamed the unpopularity of the European Union and the defeat of the constitution on its inability to stop Hewlett-Packard from cutting jobs in Europe. Wow, this “operationalize the model” excuse really has legs. Chirac said that he can’t understand why a “large company that makes considerable profits” is firing people. The truth is that they don’t make a considerable profit. At least, not anymore.
A few years ago, the media fell in love with the turnaround story of Rite Aid (RAD). They got the best management team in the business. The rearranged their debt and soon the stock jumped from $2 to $10. But it hasn’t done anything since. The best managers in the world can’t change the fact that it’s in one of the most competitive industries around. You can’t sweep in, make some bold moves and expect a turnaround to happen.
This brings me back to Patterson. Today, the company lowered its earnings guidance to $1.44 to $1.46 a share, down from $1.54 to 1.58 a share. If that forecast holds, the stock is a good buy. But the game now is forecasting the forecast, and I don’t have much faith in the forecast. Before you know it, the model gets operationalized again, and that’s never good. For now, I’ll watch these turnarounds as a friend, but not as an investor.

Posted by on November 18th, 2005 at 11:01 am


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