Patterson Companies Earnings Preview

| About: Patterson Companies (PDCO)
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Patterson Companies Inc. (NASDAQ:PDCO), a leading distributor of dental, veterinarian and rehabilitation medical supplies, is slated to report its fourth-quarter fiscal 2011 results before the opening bell on Thursday, May 26. Based of its tepid third quarter results, the Minnesota-based company, in February, pared down its earnings per share target for 2011 to $1.86-1.88 from its earlier guidance of $1.89-1.99.

The current Zacks Consensus Estimates for the fourth quarter and fiscal 2011 are 51 cents and $1.88, respectively. With respect to earnings surprises, Patterson has posted two positive surprises in the preceding four quarters while it met and trailed the Zacks Consensus Estimates on the other two occasions.

Third-Quarter Flashback

Patterson posted lukewarm third-quarter fiscal 2011 results with earnings per share of 47 cents missing the Zacks Consensus Estimate by a penny. Profit fell 1.2% year over year as higher operating costs more than offset a modest increase in the top line. Sales grew by a mere 0.6% to $824.7 million, also missing the Zacks Consensus Estimate.

Solid double-digit growth at the company’s Rehabilitation Supply division was eclipsed by the declines across its Dental Supply and Veterinary Supply businesses. Revenues from Patterson’s core Dental Supply unit dipped 2.6%, hurt by lower dental equipment sales. The results were impacted by the company’s move to reduce promotional activities for its CEREC dental restoration systems and digital imaging products.

Revenues from the Webster Veterinary Supply segment fell 1.3%, impinged by change in distribution arrangements of certain pharmaceuticals. On a positive note, Rehabilitation Supply revenues clambered 22.5% on the heels of healthy internal growth and the acquisition of DCC Healthcare.

Estimate Revisions Trend


Estimates for the forthcoming quarter have remained static over the past week and month. Out of 13 analysts covering the stock, none have made any revisions in either direction over these periods. A similar pattern applies to the estimates for fiscal 2011.


Given the lack of estimate revisions, the magnitude of revisions for the fourth quarter and fiscal 2011 has plateaued over the last seven and 30 days. This implies that the analysts are expecting the company to report in line.

Neutral 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.

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.

Patterson’s high-growth Rehabilitation Supply business is shaping up to be a major long-term growth driver. The division, despite of the unfavorable impact of the austerity measures in the U.K, continues to grow at a healthy quarterly run rate, benefiting from the synergies of acquisitions.

Moreover, Dental Supply, the largest contributor to Patterson’s sales, is expected to benefit from the gradual recovery in the dental market and the rebounding dental equipment business.

However, Patterson faces significant competition in the dental market, especially from Henry Schein Inc. (NASDAQ: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.

Although Patterson’s move to beef up promotional activities for its dental technology equipment offerings may eventually bear fruit, higher spending on such programs may dilute its fourth-quarter fiscal 2011 earnings. Our long-term Neutral recommendation on the stock is in agreement with a Zacks #3 Rank, which translates into a short-term Hold recommendation.