Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Dow Components to Research – December 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Patterson Companies (PDCO) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Patterson Companies, Inc. (Patterson) is a distributor serving three markets: the United States companion animal (dogs, cats and other common household pets) and equine veterinary supply, and the worldwide rehabilitation and assistive products supply market. The Company operates in three segments: dental supply, veterinary supply and rehabilitation supply. As Patterson’s business, Patterson Dental is a distributor of dental products in North America. Webster Veterinary (Webster) is a distributor of veterinary supplies primarily to companion-pet (dogs, cats and other common household pets) and equine veterinary clinics across the United States. Effective August 2, 2013, it acquired Mercer Mastery, a developer of dental practice software, from Lovell Minnick Partners LLC’s Mercer Advisors Inc subsidiary. In August 2013, Patterson Companies Inc completed acquisition of the stock of National Veterinary Services Limited, a wholly owned subsidiary of Dechra Pharmaceuticals PLC.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$29.82|
|Value Based on 0% Growth||$17.48|
|Market Implied Growth Rate||7.54%|
|Net Current Asset Value (NCAV)||$0.97|
Balance Sheet – October 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Patterson Companies qualifies for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the short dividend history as well as the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.77 in 2010 to only an estimated $2.06 for 2015. This level of demonstrated growth does not support the market’s implied estimate of 7.54% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of Patterson Companies (PDCO) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Patterson Companies (PDCO)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Patterson Companies (PDCO) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.