In December 2014, Patterson Companies, Inc. (NASDAQ:PDCO) announced that it has agreed to acquire Holt Dental Supply, Inc., a regional dental supply company located near Milwaukee, Wisconsin. Holt Dental serves dental practices in Wisconsin, Illinois, Minnesota, Missouri, Michigan and Indiana. PDCO indicated that such acquisition would help accelerate PDCO's local reach and deepen its Midwestern U.S. influence. Holt Dental's sales were approximately $15 million in 2013, and PDCO expects the transaction to be modestly accretive in PDCO's first year. No additional terms of the transaction were disclosed. This acquisition by PDCO follows up a deal earlier in 2014, whereby it entered an agreement with Abaxis, Inc. (NASDAQ:ABAX) to sell the full line of ABAX veterinary diagnostic products, including external reference lab services and in-clinic testing. We believe these deals by PDCO are representative of the company's efforts to build up its dental and veterinary division before spinning-off, selling or otherwise disposing of its medical rehabilitative division.
PDCO has transformed - through the acquisition of multiple companies - from a traditional dental products and services company to enter the veterinary products and services market, and to become a distributor of general medical rehabilitative devices. It is now a major product distributor and service provider in the markets of dentistry, animal health and medical rehabilitation, where each segment represents about 54 percent, 34 percent and 11 percent of its total revenue, respectively. The company has faced growth challenges in recent years due to trends in consumer out-of-pocket spending and government measures affecting the growth of national healthcare spending. The intermediate-term outlook on PDCO's dental and veterinary operations, however, is optimistic, as an aging human population and growing demand for more sophisticated hardware and software should support long-term growth in the dental market. An additional advantage for PDCO's dental and veterinary divisions is that high out-of-pocket spending in those markets reduces the threat of reimbursement pressures that occur in the healthcare industry. Medicare reimbursement pricing pressures, however, will likely continue to pressure PDCO's smaller rehabilitative care division.
In our previous article, we noted that PDCO would benefit from human demographic trends, companion pet trends, the company's economies of scale, its relationships with its suppliers and customers and an improving national economy. In addition, we noted that the veterinary business would continue to benefit from the love affair pet owners have with pets in the U.S. As PDCO works through its near-term growth issues, investors can collect a solid dividend and benefit from an ongoing and substantial buyback of PDCO shares. Finally, the possibility of an acquisition of PDCO is likely, given the attractiveness of the company's profitable business, competitive position in the markets it competes in and the demographic trends that favor the company's businesses. PDCO shares had run up from slightly under $39, when our first article on the company was published, to above $49, and have receded to about $47, but we do not believe the shares are done rising. One analyst indicated that the valuation of the company's shares could be aided by the likely sale of its profitable but reimbursement-challenged medical division operations and recapitalization of its balance sheet. Another analyst suggested that the medical rehabilitative division is a candidate for a spin-off. We agree with such analysts with respect to the possible sale or spin-off of the profitable but challenged medical division in the near term. We also believe that the divestiture of such division will strongly reward shareholders over the long term as the company focuses on its two strongest divisions.
Disclosure: The author is long PDCO.
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