Why PSS World Medical's Shares Got Crushed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of health-care products distributor PSS World Medical (NAS: PSSI) were looking ill today, as they fell as much as 15% in intraday trading after the company announced fiscal fourth-quarter results.

So what: It's generally not good news when a company announces a "strategic transformation plan," as PSS did today. If we follow the classic advice of "if it ain't broke, don't fix it," then a transformational effort likely means that something is indeed broken. A look at PSS's March-quarter results suggests that that assumption may be on target.

For the quarter, sales fell 2% from last year, and the $539 million the company reported was short of the $556 million analysts were looking for. On the bottom line, earnings per share of $0.38 were flat from a year ago, but noticeably below the $0.43 that Wall Street expected.

Now what: The distributor's restructuring will aim to focus its business on faster-growing segments: physician, laboratory, in-office dispensing, and home and hospice care. It plans to divest its skilled nursing and specialty dental businesses. If management is able to hit its goals for the transformation it could work out well for investors. CEO Gary Corless said they're targeting doubling revenue and bringing operating margins to above 10% over "the next several years." For the sake of comparison, fiscal 2012 operating margins were 6.4%, and they were 6.6% in fiscal 2011.

But whether it will work out as management hopes is another matter. For today at least, investors seem skeptical.

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