What’s Wrong with Patterson?

One of the best stocks on Wall Street keeps getting hammered. Patterson Companies (PDCO) is now below $40 a share. The stock is over 25% below its high, and it’s not far from where it was last May.
This is so surprising when you consider how strong Patterson has been. The company makes dental supplies. Patterson has simply been one of the best stocks on the Street. Every quarter, every year, Patterson delivers rising sales and earnings. The company’s return-on-equity has been above 20% for the last 10 years. It could be longer but that’s as far back as my records go.
So what’s happening? Last quarter, PDCO was only able to grow its earning-per-share by 3%. And in the quarter before that, it grew its earnings by 9%. For most stocks, that’s not so bad. But for Patterson, it’s quite a break from its usual 15%-20% earnings increases. Note how smooth and steady the earnings line (rolling EPS) has been on the chart below.
The company is now being hit by the predictable rash of class-action lawsuits. I’d ignore those, but the real test will be next quarter’s earnings which are due on November 23. The current estimate is for 35 cents a share, which would be a 13% increase over last year. But if PDCO delivers 37 cents or more, that will tell me that its troubles may be behind it and the stock is worth another look.
PDCO.bmp

Posted by on October 3rd, 2005 at 12:09 pm


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