I wanted to talk about Patterson Companies, Inc. (PDCO) and why I believe it could be undervalued. So here’s the deal: PDCO is currently trading at a 40% price-to-earnings (P/E) discount compared to its peers. That’s a pretty significant difference.

When we look at the company’s earnings power and asset profitability, it becomes even more evident that PDCO is undervalued. Investors are currently not willing to pay more than 12 times forward earnings for the stock, which is still a 40% discount compared to the sector. It’s interesting to note that PDCO’s total revenue in the last 12 months is greater than its current market cap, which means the company has more value in its assets than its entire market valuation.

Based on all these factors, I believe that PDCO could be undervalued by around 15-20%. In fact, I’m considering it a buy and expecting the stock to reach a market value of $3 billion or $31 per share. This is mainly because of the company’s growth initiatives and its respectable dividend yield.

However, it’s important to consider some risks before making any investment decisions. There’s always a chance that PDCO may not meet the projected expectations, which could lead to a negative market reaction. The stock has also been experiencing a long-term downtrend in its market valuation, so a significant change in sentiment is needed to turn things around. Additionally, market-specific and macroeconomic factors such as market volatility, inflation, and interest rates can impact stock prices.

One particular risk to keep in mind is PDCO’s outstanding debt, which could be sensitive to sharp changes in interest rates. Although the company has been paying down its debt, the interest expense has increased recently.

Speaking of earnings, PDCO is expected to report its Q4 and FY’23 earnings soon. The management projects earnings in the range of $1.96-$2.06 for FY’23 and adjusted earnings of $2.25-$2.35. Analysts have revised their estimates, with consensus now expecting $2.27 in earnings for this year. These numbers are above previous estimates, which is a positive sign.

Looking back at the previous quarter, PDCO had decent numbers. It achieved a YoY growth in turnover and gross margin. The dental and animal health segments showed mixed results, with some challenges and competition affecting sales. However, the overall operating income increased by 25%, demonstrating the company’s operating leverage.

It’s worth mentioning that PDCO has been implementing various growth initiatives, such as investing in sustainable warehouses and loyalty programs. These initiatives, along with the company’s past profitability and returns on capital, indicate its ability to create value for shareholders.

In terms of valuation, PDCO appears undervalued when considering its earnings power and asset profitability. The stock is trading at a discount compared to its sector, with a low P/E ratio, low forward EBIT multiple, and low price-to-book ratio. Based on my analysis, I estimate that PDCO’s market cap should be around $3 billion or $31 per share, which suggests a potential undervaluation of 15-20%.

I believe that PDCO presents a compelling investment opportunity. The stock seems to be undervalued considering its earnings potential and asset profitability. While there are risks to consider, such as missing projections or market sentiment, I remain bullish on PDCO’s prospects. With a cautious outlook on the market and a clear understanding of the risks involved, investing in PDCO could offer a good margin of safety and potential for a valuation re-rating.