Patterson (PDCO): Rotting From Within
Long/Short Equity
Seeking Alpha Analyst Since 2018
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Summary
- Rising risk of corporate collapse:Debt/EBITDA would have been well over 4x in FY20, without factoring.
- Unexplained interest costs (Hidden leverage?).
- Front loaded profits: PDCO books its LT vendor financing spread as an up-front capital gain.
- Factoring is maxed out, collateralisation is up, and receivables are extending.
- Declining sales quality and contracting margins.
Patterson (PDCO) is struggling. On-line competitors, eg Chewy (CHWY) in animal supplies, are taking share and profit. PDCO seems unable to protect its position. Revenue is stagnating and margins are down and its credit is declining. There is a rising risk that suppliers will cut credit, the business will collapse and they will default.
Financial engineering: Superficially, PDCO has stabilised revenue and cut its debt. In reality, it is propping up sales by funding its customers and obscuring debt levels by factoring receivables. Short term working capital has fallen, but long term receivables (bad debt?) and payables are rising and interest costs twice what they should be.
Declining business quality: Animal Health revenue is growing, but margins are close to zero. Dental revenue is down, despite vendor financing, and real margins have dropped 39%. Software and value added services revenue is flat. Cashflow would have been down 53% without the accounting gains from front-loading financing profit.
Poor governance: The board and management are protected by a range of poison pills, legislation and some tame shareholders. This could explain why management compensation keeps rising while the required goals for bonuses keep dropping. Management is being rewarded for destroying shareholder value.
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