Guidance Down at Central Garden
Management at Central Garden & Pet Company (CENT) is addressing a difficult environment of adverse weather and higher costs, which have affected sales and profitability. The benefits from the strategy of expanding the operating margin through a positive mix shift towards higher margin products and the optimization of the supply chain has been delayed.
Higher grain costs and increased interest expense (from a more leveraged balance sheet from recent acquisitions) negatively impacted profitability in fiscal 2007. Management has lowered both sales and earnings guidance for 2008. However, the stock's decline discounts many of the negative developments. Therefore, the shares of Central Garden & Pet are rated a Hold.
Central Garden & Pet is currently selling at 10.3 times trailing 12-month EPS. Over the last few years, the stock has traded in a P/E range of 12 to 20, with the stock breaking down to a 9 P/E in September 2007. The increase in grain costs and the highly leveraged balance sheet are expected to negatively impact profits in fiscal 2008.
The highly seasonal nature of business has always clouded the near-term outlook of the stock. Nevertheless, the company continues to grow market share, and the company's outlook for its pet category, including dog and cat, equine, and animal health and nutrition categories, remains solid. Given the cross-currents of a difficult gardening season (especially in the Southeast), higher grain costs, and increased interest expense, the target price is $4.75, which is a 12 P/E multiple on trailing 12-month EPS.
Quality Systems Has Limits
Quality Systems Inc. (QSII), comprised of the QSI division and its NextGen Healthcare Information Systems subsidiary, develops and markets healthcare information systems that automate medical and dental practices, networks of practices such as physician hospital organizations (PHO's) and management service organizations (MSO's), ambulatory care centers, community health centers, and medical and dental schools. The QSI division, co-located with the company's corporate headquarters in Irvine, California, currently focuses on developing, marketing, and supporting software suites sold to dental and certain niche medical practices.
NextGen Healthcare announced a partnership with Practice Plus. Cardiac Science announced the addition of NextGen as its next certified EMR system partner. With gross margin and operating margin at significant highs, substantial further improvement may be difficult. Our price target is based on roughly a 0.9x P/E/G on our calendar 2008 EPS estimate.
At its current price of $31.10 per share, QSII is trading at roughly 18x our fiscal 2009 EPS of $1.78 and roughly 19x our calendar 2008 EPS estimate. With gross margin and operating margin at significant highs, substantial further margin improvement may be difficult.
