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Patterson Companies (PDCO), a leading distributor of dental, veterinarian and rehabilitation medical supplies, is slated to report its third-quarter fiscal 2012 results before trading begins on Thursday, February 23. Analysts polled by Zacks are currently looking for revenues and earnings per share of $864 million and 50 cents for the quarter, respectively.

With respect to earnings surprises, the Minnesota-based company has posted three negative surprises in the preceding four quarters while it beat the Zacks Consensus Estimate on one occasion.

Second Quarter Recap

Patterson posted tepid second quarter results with both revenues and earnings missing the Zacks Consensus Estimates. Profit 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 inched down roughly 2% as the company booked lower sales from its dental equipment business due to decline in revenues from its CEREC (chair-side restoration system) dental restoration systems.

Revenues from the Webster Veterinary Supply division jumped 7%, helped by the contributions of veterinary distributor American Veterinary Supply Corporation, which the company acquired in August 2011.

The Patterson Medical unit posted modest growth of roughly 1%, impacted by lower equipment and software sales which offset gains in consumable and printed products. The company narrowed its earnings guidance for fiscal 2012.

Estimate Revisions Trend

Agreement

Estimates for the third quarter demonstrate absolute lack of activity with no movements in either direction over the last week and month. A similar trend applies to fiscal 2012.

Magnitude

Given the lack of estimate revision, estimates for the third quarter as well as fiscal 2012 have been stationary over the last 7 and 30 days. The current Zacks Consensus Estimate for fiscal 2012 is $1.92, representing an estimated 1.36% year-over- year increase.

Our View

Patterson provides a wide range of consumables, equipment and software and value-added services to its customers. It should benefit from improving North American dental industry fundamentals.

Patterson is exploring lucrative acquisition deals to strengthen its market position and geographic reach. Moreover, its sustained investment in infrastructure should boost operational efficiencies.

The company continues to invest in technology upgrades to its CEREC platform, helping it to increase the associated customer base. Adoption of new technology equipment (including CEREC) is expected to grow as dentists continue to spend on switching from film to digital radiography.

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. The company is also investing in technologies to boost the profitability of its veterinary business. Moreover, its Rehabilitation Supply business is poised to be a key long-term growth driver and should benefit from the synergies of acquisitions.

However, Patterson faces significant competition in the dental market, especially from Henry Schein (HSIC). Although its move to boost promotion for its dental technology equipment offerings should bear fruit, associated expenses are dilutive to bottom line and margins.

Moreover, charges associated with ESOP are expected to weigh on the company's third quarter earnings. Our long-term Neutral recommendation on the stock is in tandem with a Zacks #3 Rank, which translates into a short-term Hold recommendation.

HENRY SCHEIN IN: Free Stock Analysis Report

PATTERSON COS: Free Stock Analysis Report

Source: Patterson Companies: Earnings Preview