Patterson Companies: Earnings Preview

| About: Patterson Companies (PDCO)

Patterson Companies (NASDAQ:PDCO), a leading distributor of dental, veterinarian and rehabilitation medical supplies, is scheduled to report its first-quarter fiscal 2012 results before the opening bell on Thursday, August 25.

The current Zacks Consensus Estimates for the first quarter is 44 cents, an estimated annualized decline of 1.21%. With respect to earnings surprises, Patterson’s performance over the past four quarters has been erratic. The Minnesota-based company has posted two positive surprises in the preceding four quarters while it met and trailed the Zacks Consensus Estimates on the other two occasions.

Fourth Quarter Recap

Patterson posted better-than-expected fourth-quarter fiscal 2011 results with earnings per share of 53 cents beating the Zacks Consensus Estimate by a couple of cents. Profit edged up 1.5% year over year on account of higher revenues (up roughly 9% to $883.8 million), which comfortably beat the Zacks Consensus Estimate.

Revenues were driven by higher sales across the board with Patterson’s dental technology equipment business delivering double-digit growth in the quarter, bouncing back from a soft third quarter.

Patterson’s core Dental Supply business returned to the growth track in the quarter with sales increasing 5%. Dental equipment and software revenues climbed 11% owing to strong sales of new technology equipment, such as CEREC dental restoration systems and digital imaging systems, backed by the company’s promotional initiatives.

Webster Veterinary Supply segment posted a growth of 13.6% in the quarter, boosted by higher consumable sales. Revenues from the Rehabilitation Supply business zoomed 22%, bolstered by the DCC Healthcare acquisition.

However, margins contracted in the quarter, impacted by spending on promotional activities. The company’s earnings guidance for fiscal 2012 was below the Street view.

Estimate Revisions Trend


Estimates for the forthcoming quarter demonstrate modest activity with just 2 analysts (out of 11) having raised their forecasts over the past week and month with none moving in the reverse direction over the same timeframes. For fiscal 2012, 2 analysts (out of 11) have trimmed their estimates over the last 30 days with no upward revisions. There were no movements in either direction over the past 7 days.


The magnitude of revisions for the first quarter and fiscal 2012 has been stationary over the last 7 days. However, there was a decline of a couple of cents in the estimate for fiscal 2012 over the past 30 days. The current Zacks Consensus Estimate for fiscal 2012 is $1.96, representing an estimated 3.80% year over year increase.

Our Take on Patterson

Patterson provides a wide range of consumable supplies, equipment and software and value-added services to its customers. The company’s wide product range hedges it from any meaningful sales shortfall in a soft economy.

Improving North American dental industry fundamentals are expected to benefit Patterson. The company’s sustained investment in infrastructure should boost operational efficiencies. Moreover, Patterson is exploring lucrative acquisition deals to strengthen its market position and geographic reach.

Patterson remains successful in growing revenues on a quarterly basis driven by double-digit growth at its Rehabilitation Supply unit, which is benefiting from the synergies of acquisitions. The division continues to grow at a healthy quarterly run rate despite the unfavorablee impact of the austerity measures in the U.K.

Patterson should also benefit from the rebounding dental equipment business, assisted by the increased technology marketing/promotional activities. The company is upbeat about the prospects of its dental equipment business and envisions high single-digit revenue growth in fiscal 2012.

However, Patterson faces significant competition in the dental market, especially from Henry Schein Inc (NASDAQ:HSIC). Moreover, the company’s aggressive acquisition could lead to substantial integration risk. Cost associated with DCC Healthcare integration may also dent its bottom line. Our long-term Neutral recommendation on the stock is in agreement with a Zacks #3 Rank, which translates into a short-term Hold recommendation.