Patterson Companies, Inc. (PDCO): This Health Care Stock Looks Good

Sirona Dental Systems, Inc. (NASDAQ:SIRO)’s outlook pretty much mirrored what Henry Schein, Inc. (NASDAQ:HSIC) had said earlier. It had also spoken of stability in North American dental conditions and an overall animal health market growing 4%-5%. In addition, its commentary on competition from local players (versus large national distributors like Patterson Companies, Inc. (NASDAQ:PDCO) and Henry Schein) was very interesting. It argued that the increasing share of dentistry spend on technology would make things harder for the smaller players. This is obviously good news for Patterson too, and suggests that there are consolidation opportunities within the fragmented dental distribution sector.

Where next for Patterson Companies?

In conclusion I think Patterson Companies, Inc. (NASDAQ:PDCO)’s attractive features remain in place. It is not the sexiest stock out there, but it is highly cash generative, with $277 million in free cash flow brought in for 2013 and a similar amount forecast for 2014. This represents 6.5% of its enterprise value of $4.25 billion, and given the relative stability of its growth prospects I think it is a decent value.

The question will always be over its growth prospects. Investors will have to look for sales of Sirona Dental Systems, Inc. (NASDAQ:SIRO)’s products to generate top line sales growth and hope for an improvement in overall economic conditions. In addition Patterson Companies, Inc. (NASDAQ:PDCO)announced a $55-$65 million investment in information systems which should generate operational efficiencies (and margin expansion) down the line but will reduce EPS by around $0.06 next year.

It is a nice mix of modest upside potential with limited downside and on a decent evaluation. Well worth a look for a value investor.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article This Health Care Stock Looks Good originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.