OK are they ready to roll??????
IMO YES.....this company has bottomed, and will base, then we move UP!!!! Do your own DD and also read this report! I C Profit!!!!
Aug 06, 1999
PSS World Medical: Clean Bill of Health
by Dave Sterman 8/6/99
Nothing like an ill-advised acquisition to sour investors.
Just ask recent shareholders of PSS World Medical
(NASDAQ:PSSI - news) .
The distributor of medical office supplies traded at around $23 at the beginning of the year. But with
each passing week in 1999, the shares have been slipping, bottoming at $8.44 as investors began to
realize that a 1998 acquisition of competitor Gulf South was less-than-clever.
That deal, which helped PSS expand its reach from doctors offices into managed care facilities,
deserved more management scrutiny. Gulf South, as it turns out, was a poorly run company that had
used overly aggressive accounting procedures.
For most of the last year, PSS has been busy shoring up Gulf South by cutting out operational fat
and replacing poor top management. But just as the company has gotten its house in order, pricing
pressures in the managed care arena have caused the Gulf South segment to report wafer-thin profit
margins.
Though management is now taking steps to rebuild the profit margin picture through the elimination of
unprofitable contracts at Gulf South, investors should remember one key point: Gulf South accounts
for only 21% of PSS' business. In fact, the company's two other divisions, Diagnostic Imaging
(37.4% of sales) and the core medical supplies distribution business (39.7%) look quite robust.
Diagnostic Imaging products such as X-ray machines represent one of the hottest segments of the
medical device market. And recent deals with Eastman Kodak (NYSE:EK - news) and Phillips, the
industry leaders, ensure that PSS has the best equipment to offer to doctors.
But PSS' core distribution business is the crown jewel. The company has 58 medical distribution
centers that handle nearly 45,000 products. If a physician orders a product before 10:30 a.m., the
company promises to deliver the products the same day.
Though this is not a high-growth business, as the company acquires smaller competitors, it is
continually achieving an impressive rate of margin expansion. As company CEO Pat Kelly notes,
operating leverage should help the company boost earnings 17% this fiscal year (that started April).
That kind of earnings growth is quite achievable for the company. As the company has acquired and
integrated other players in the past, it has been able to boost per share earnings 60% annually over
the last five years. Much of that has come through operating leverage as sales have "only" grown
38% annually in that time frame.
Thanks to the recent woes at the company's Gulf South division, though, the shares have become
quite cheap. At a recent $10.31, they sell for just 11.6 times this year's projected earnings of $0.89
a share. Analysts generally agree that the worst is behind the company and figure earnings could
jump another 19% next year to $1.06 a share.
The shares also now trade for less than half of sales. By contrast, other resellers of medical supplies
sell for 7.5 times sales, according to Market Guide. Quite a difference.
First Union's Chris McFadden thinks the company has a great opportunity to "leverage substantial
investments in information technology, logistics, and marketing." He also thinks the recent addition of
new chief operating officer Gene Dell could lend further gains to the bottom line. "Dell will do an
excellent job of traversing the entire organization to root out operating inefficiencies in such areas as
data processing, human resources, purchasing, distribution and travel services," he wrote in a recent
note.
As an added kicker, PSS may just be gobbled up at a premium if the share price continues to
languish. "We continue to believe that PSS holds strategic value to companies such as McKesson
(NYSE:MCK - news) as the aggressive, young PSS sales force is a huge strategic asset, looking to
move product and gain market share," wrote Deutsche Banc Alex. Brown's Beth Anne Cariello in a
research report.
Bottom Line:
Burned investors don't seem to realize that the worst appears to be behind PSS. |
