Patterson Companies

One of the things I like about this blog is that it let’s me think out loud. For example, there’s one stock I’ve been following that I’m truly undecided about. The company is Patterson Companies (PDCO). It’s exactly the kind of stock I like. Steady earnings growth, high returns-on-equity and consistent operating history.
The company makes supplies for the dental industry, and it’s a major supplier for the veterinary industry (don’t laugh, it’s very profitable). For several years now the company has grown its earnings by 20% a year like clockwork. To come up with an estimate for next quarter, all you had to do was add 20% to last year’s quarter, plus or minus a penny, then sit back and watch. The stock acted like a bond with a 20% coupon. Here’s the company’s earnings-per-share for the last 10 fiscal years:
1996 $0.22
1997 $0.25
1998 $0.31
1999 $0.38
2000 $0.48
2001 $0.57
2002 $0.70
2003 $0.85
2004 $1.09
2005 $1.32
Not too shabby. There aren’t many companies like that. But then the bombshell came. In May the company totally and completely missed earnings. Wall Street was expecting 39 cents a share, Patterson made only 36 cents. That’s like Tiger Woods missing a three-foot putt. What the hell happened? The year before, Patterson had earned 33 cents a share. This was so…unexpected. The market freaked out and Patterson’s stock fell 14% in one day.
Wall Street started to bring down its earnings estimates, and in August Patterson missed again! This time, the Street was expecting 32 cents a share compared with 30 cents the year before, but Patterson reported 31 cents. This couldn’t be happening!
How could this happen for two straight quarters? I was baffled—plus, I could never understand the company’s explanation. It seemed that business was quite simply slower. Was this just a blip, or was there something bigger at work?
I’m very suspicious of “blips.” I just don’t like them. I don’t consider myself a bottom-fisher, and I stay away from turnaround plays. Some companies do turn around, it’s just very, very, very hard. For every one Harley Davidson (HDI), there are ten Rite Aids (RAD). Patterson’s stock has continued to drift lower, and it’s now over 22% off its pre-bombshell high. But I’m still too afraid to go in. Yes, I know. Bock. Bock. But I just can’t pull the trigger.
Earnings are due again on November 23 and I’m already sweating. Should I be this emotional about a stock I don’t even own? Last year, Patterson made 31 cents a share and said it’s expecting earnings of 35 cent to 37 cents a share for this quarter. I’m almost as afraid of a good quarter as I am of a bad one. If Patterson delivers great results, should I go back in? I just can’t ignore two lousy quarters. If the results are rotten, then the story is easy. The company just ain’t no good no more.
But what if it’s a screaming buy and I’m not listening?

Posted by on November 10th, 2005 at 11:20 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.