Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Most Undervalued Companies for the Defensive Investor – AugustÂ 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Patterson Companies Inc. (PDCO)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Patterson Companies, Inc. is a distributor serving the dental, veterinary and rehabilitation supply markets. The Company operates through three segments: dental supply, veterinary supply and rehabilitation supply. The Company’s dental supply segment provides consumable products (including x-ray film, restorative materials, hand instruments and sterilization products); basic and advanced technology dental equipment; practice management and clinical software; patient education systems, and office forms and stationery. The Company’s veterinary supply segment distributes veterinary supplies to companion-pet (dogs, cats and other common household pets), equine and large animal veterinarians and veterinary clinics, public and private institutions and shelters across the United States and in the United Kingdom. The rehabilitation supply segment distributes rehabilitation medical supplies and equipment.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of PDCO – September 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$4,613,120,672||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.60||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||35.58%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||20.34||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.96||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.60||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||1.56||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||2.93%|
|MG Value based on 3% Growth||$31.85|
|MG Value based on 0% Growth||$18.67|
|Market Implied Growth Rate||5.92%|
|% of Intrinsic Value||141.70%|
Patterson Companies Inc.Â qualifies for the Enterprising Investor but not the more conservative Defensive Investor. Â The Defensive Investor is concerned by the short dividend historyÂ and the high PEmg and PB ratios,Â while the Enterprising Investor is only initially concerned with the level of debt relative to the net current assets.Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation,Â the company appears to be overvalued after growingÂ itsÂ EPSmg (normalized earnings) from $1.84 in 2012 to an estimated $2.20 for 2016. Â This level of demonstrated earnings growth does not support the market’s implied estimate of 5.92% annual earnings growth over the next 7-10 years.Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value belowÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Patterson Companies Inc. (PDCO)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$9.22|
|Number of Consecutive Years of Dividend Growth||7|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$1,801,802,000|
|Total Current Liabilities||$694,135,000|
|Shares Outstanding (Diluted Average)||100,162,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.42|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.20|
Other ModernGraham posts about the company
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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