Earnings Scorecard: Paterson Companies

| About: Patterson Companies (PDCO)

Leading distributor of dental, veterinarian and rehabilitation medical supplies Patterson Companies Inc (PDCO) posted second-quarter fiscal 2011 (ended October 30) earnings per share of 45 cents, in line with the Zacks Consensus Estimate.

Second Quarter Highlights
Profit rose 8% year over year on account of higher sales (up 5%), which beat the Zacks Consensus Estimate. Growth was supported by higher revenues from the company’s Dental Supply and Rehabilitation Supply businesses, acquisitions and favorable foreign exchange translation.

Revenues from Patterson’s core Dental Supply business increased 5% year over year. Higher sales from CEREC dental restoration systems and digital imaging systems fueled healthy growth in dental equipment and software revenues (up 14%). Webster Veterinary Supply segment grew modestly in the quarter, impacted by lower consumable sales. Rehabilitation Supply revenues climbed 13% on the back of acquisitions. The company has reaffirmed its fiscal 2011 earnings guidance.

We have discussed the quarterly results at length here: Patterson Co. Beats on Revenues

Agreement – Estimate Revisions
Estimates for Patterson for fiscal 2011 are inclined towards the positive side following the second quarter results. Out of 14 analysts covering the stock, 6 have raised their estimates over the past week while 2 have made negative revisions over the same period.

Similarly, 3 analysts (out of 14) have lifted their forecasts for fiscal 2012 over the last 7 days accompanied by a solitary movement in the opposite direction.

The bullish sentiment reflects Patterson’s rebounding basic dental equipment business and upbeat prospects for its CEREC systems with expectations for incremental growth in second-half of fiscal 2011. However, some headwinds in the veterinary division and concerns over the organic growth of the company’s dental consumables business keep a few analysts cautious.

Magnitude – Consensus Estimate Trend
Despite the positive estimate revisions, earnings estimates for fiscal 2011 have remained stagnant over the past week. However, estimates for fiscal 2012 have moved up by a penny over the same period. The current Zacks Consensus Estimate for fiscal 2011 is $1.94, representing an estimated year-over-year growth of 9.23%.

“Neutral” on Patterson
Patterson provides a wide range of consumable supplies, equipment and software and value-added services to its customers. The company has been successful in growing revenues over the past few quarters, driven by double-digit growth at its Rehabilitation Supply unit. The division benefits from the synergies arising from acquisitions.

Patterson continues to invest in infrastructure to boost operational efficiencies. Moreover, the company is exploring lucrative acquisition deals to boost its market position and geographic reach.

Moving forward, Dental Supply, the largest contributor to Patterson’s revenues, is expected to benefit from the gradual recovery in the dental market and its rebounding dental equipment business. This is expected to support sustained operating margin expansion and may better position the company to deliver positive earnings surprises in the quarters ahead.

However, Patterson faces significant competition in the dental market, especially from Henry Schein Inc (HSIC). The U.S. dental products distribution industry is highly competitive and consists principally of national, regional and local full-service and mail-order distributors. We also remain cautious about the company’s aggressive acquisition strategy to drive growth, given the inherent integration risk. Our long-term Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).