Earnings Scorecard: Patterson Companies

Sep. 6.11 | About: Patterson Companies (PDCO)

Patterson Companies (NASDAQ:PDCO), a leading distributor of dental, companion-pet veterinarian and rehabilitation medical supplies, posted tepid first-quarter fiscal 2012 (ended July 30) results with earnings per share of 42 cents trailing both the Zacks Consensus Estimate and the year-ago earnings.

Highlights from the Quarter

Profit tumbled roughly 10% year over year on account of costs associated with the company’s Employee Stock Ownership Plan (“ESOP”). Revenues fell 0.3% year over year $847.4 million, missing the Zacks Consensus Estimate. However, on a comparable basis (excluding the impact of the benefit from an additional week a year ago) sales rose 6%.

Sales from Patterson’s core Dental Supply division rose roughly 4% on a comparable basis on the back of higher dental equipment and software sales. Dental equipment revenues were powered by healthy sales of new technology equipment such as CEREC dental restoration systems and digital imaging products.

Revenues from the Webster Veterinary Supply unit climbed 8% on a comparable basis, led by solid sales of consumable supplies. Rehabilitation Supply business remained on the growth track with sales surging 12% (on a comparable basis), buoyed by the DCC Healthcare acquisition and favorable foreign exchange translation. Patterson reaffirmed its earnings guidance for fiscal 2012.

Agreement – Estimate Revisions

Estimates for Patterson are clearly inclined on the negative side following the first quarter results. Out of 12 analysts currently covering the stock, 8 have trimmed their forecasts for fiscal 2012 over the past month with one moving in the opposite direction. For fiscal 2013, 4 analysts (out of 11) have lowered their forecasts over the last 30 days with no positive revisions. There were no movements in either direction over the past week.

Magnitude – Consensus Estimate Trend

Despite negative revisions, estimate for fiscal 2012 remained stationary over the past month while increasing by a penny over the past week. However, estimates for fiscal 2013 have gone down by a couple of cents over the past 30 days (static over the last 7 days). The current Zacks Consensus Estimates for fiscal 2012 and 2013 are $1.96 and $2.17, respectively, representing an estimated year-over-year growth of 3.48% and 10.95%, respectively.

Patterson in Neutral Zone

Patterson should benefit from improving North American dental industry fundamentals. 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. Its Webster division recently announced the acquisition of veterinary distributor American Veterinary Supply Corporation.

Although patient demand for dental services has been tepid at the height of recession, Patterson should benefit from the gradual recovery in the dental market and the rebounding dental equipment business, assisted by promotional initiatives. Revenues from new technology equipment are growing at a healthy pace as dentists continue to switch from film to digital radiography.

Patterson continues to invest in technology upgrades to its CEREC platform, helping it to increase the associated customer base. The company remains upbeat about the prospects of its dental equipment business and envisions high single-digit revenue growth in fiscal 2012.

Patterson’s Rehabilitation Supply business continues to grow at a healthy quarterly run rate, despite the unfavorable impact of the austerity measures in the U.K and current regulatory uncertainties in the U.S. The division is benefiting from the synergies of acquisitions.

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.

Although Patterson’s move to boost promotional activities for its dental technology equipment offerings has contributed to higher sales from this product category, associated expenses are dilutive to its bottom line and margins. Moreover, charges associated with ESOP are expected to weigh on earnings in fiscal 2012 and beyond.

This leads us to take a Neutral stance on Patterson. The stock currently retains a Zacks #4 Rank, which translates into a short-term “Sell” recommendation.