Patterson Companies (NASDAQ:PDCO), a leading distributor of dental, veterinarian and rehabilitation medical supplies, posted tepid second-quarter fiscal 2012 results with both revenues and earnings trailing the Zacks Consensus Estimates.
Second Quarter Highlights
Profit for the quarter dipped roughly 8% year over year on account of costs associated with the company’s Employee Stock Ownership Plan (“ESOP”). Revenues were essentially flat year over year at $856.9 million.
Sales from Patterson’s core Dental Supply division edged down roughly 2% as the company registered lower sales from its dental equipment business in the quarter due to decline in revenues from its CEREC dental restoration systems.
Revenues from the Webster Veterinary Supply division jumped 7% year over year, helped by the contributions of veterinary distributor American Veterinary Supply Corporation, which Patterson acquired in August 2011.
The Patterson Medical unit posted tepid growth of roughly 1% in the quarter, impacted by lower equipment and software sales which offset gains in consumable and printed products. The company narrowed its earnings guidance for fiscal 2012 to a band of $1.90 to $1.97 a share from its earlier view of $1.90 to $2.00.Agreement – Estimate Revisions
Annual estimates for Patterson are trending downward following its second quarter results. Out of 13 analysts currently covering the stock, 10 have chopped their forecasts for fiscal 2012 over the past week and month with 2 moving in the opposite direction over these periods.
A somewhat similar trend is observed for fiscal 2013 with 6 analysts (out of 13) having pruned their forecasts over the last 30 days with 3 positive revisions. The bearishness mostly reflects the company’s guidance revision.
Magnitude – Consensus Estimate Trend
Given the negative revisions, estimate for fiscal 2012 has reduced by 2 cents over the past month. Similarly, estimate for fiscal 2013 has gone down by a couple of cents over the past 30 days. There were no moves over the past week. The current Zacks Consensus Estimates for fiscal 2012 and 2013 are $1.92 and $2.14, respectively.
Retaining our Neutral View
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.
Adoption of new technology equipment (including the CEREC chair-side restoration system and Schick digital x-ray) is expected to grow as dentists continue to spend on switching from film to digital radiography.
The company continues to invest on technology upgrades to its CEREC platform, helping it to increase associated customer base. Patterson remains upbeat about the prospects of its dental equipment business and its move to boost promotional activities is expected to contribute to higher demand for this product category in the back half of fiscal 2012.
Patterson is also investing in technologies to boost the profitability of its veterinary business. Moreover, the company recently opened a new facility called Patterson Technology Center which employs roughly 400 personnel dedicated to support its dental, veterinary and rehabilitation customers.
Patterson’s Rehabilitation Supply business is poised to be a key long-term growth driver despite the unfavorable impact of the austerity measures in the U.K and current regulatory uncertainties in the U.S. The division should benefit from the synergies of acquisitions.
However, Patterson faces significant competition in the dental market, especially from Henry Schein (NASDAQ:HSIC). Moreover, the company’s aggressive acquisition could lead to substantial integration risk.
Although Patterson’s move to boost promotion for its dental technology equipment offerings should bear fruit, associated expenses are dilutive to its bottom line and margins. Moreover, charges associated with ESOP are expected to weigh on its earnings in fiscal 2012 and beyond. This leads us to tread with caution.
Our Neutral recommendation on the stock is in tandem with a Zacks #3 Rank, which translates into a short-term Hold recommendation.