American Dental Partners - In honor of my parents

The stock looks too small for my liking - after sustaining heavy losses in my portfolio primarily in small names without ultra-strong competitive advantages, i'm vowing to follow Warren Buffet and only purchase companies with moats (at least small ones). If I followed that logic I would have stayed away from China 3c and Aircastle - two companies that are driving my overall performance hugely in the red. But, going back to ADPI, my parents are dentist hence i feel obligated to take a quick look at this one:)

ADPI is a management company affiliated with ~500 dentists. It takes control of the business aspects of the practice and aims to improve revenue/profitability.

Litigation. The stock has nicely and calmly been trading at ~20 level before one of largest ADPI affiliates decided to get out the contract and sue ADPI alleging certain breaches of contract. The companies settled, with PDG (affiliate name) liberating itself from ADPI. PDG accounted for ~$15M of EBITDA (~27% of total).
Business model. Company was formed in 1995, it operates as a partner to large dental groups, managing non-clinical aspects of the business (like owning equipment and facilities). The dental group itself manages all the doctor-related aspects of the operation. The key question: is ADPI simply a source of capital, or is there something value-added about the business. ADPI says it provides valuable services like IT systems, planning, recruiting, facility management, administration. This doesn't sound like nuclear physics, but certainly makes the doctor's like easier.

The company doesn't technically buy the practice (it can't legally), but rather signs 40-year service agrreement, and is paid a fee that's typically based on a percentage of revenues - expenses.

I think the model theoretically sounds pretty good. HOWEVER defection of the largest customer raises a big red flag in my mind - if they defected, is the service actually that valuable/why wouldn't other ones follow? I assume there are many other organization who can provide comparable offering, so overall I'd stay awaaaay.



Industry. Overall dental care has grown at 7% CAGR and is projected doing so going forward. Industry is dominated by solo practioners, that account for 64% of total 160K dentist working in the U.S.

IKON - Bad Industry at a Bad Price

IKON's main business is selling and servicing printers manufactured by, well, anyone else but IKON. It also has a 20% of sales business managing corporate office centers - if your company has a mini post office, that nice lady there is actually an employee of ICON. Why would manufacturers need IKON to sell their products? For large corporate accounts they actually don't, but there are thousands of small businesses out there that Canon and HP don't want to be bothered with and that's where IKON steps in.
The main issue with IKON is that paper usage has been declining, pressuring service segment revenues (the less people print, the less things break down), while equipment sales have been flat because of combination of competition & declining sales of B&W printers. The company has started to aggressively push color recently and the analysts expect/suspect this initiative to show results in 2008/2009.
Company is currently trading at ~9X EBITA. I just don't see why this should trade any higher, given low-single digit long-term growth prospects and margins close to flat/improving by 50bps or so. Maybe some OEM would want to buy it, but given this would arouse lots of yelling among other OEMs whose products IKON sells, the buyer would need to be very suicidal. Overall I expect the stock to languish around the same level where it is right now for a long while.