Zacks_Analysts' Blog : Earnings Preview: Patterson Co. - Analyst Blog

Patterson Companies (PDCO), a leading distributor of dental, veterinarian and rehabilitation medical supplies, is slated to report its second-quarter fiscal 2012 results on Tuesday, November 22.

Analysts polled by Zacks are currently looking for earnings per share of 47 cents for the second quarter, an estimated annualized growth of 3.59%. The Zacks Consensus Estimate for revenues is $887 million.

With respect to earnings surprises, Patterson’s performance over the past four quarters has been sporadic. The Minnesota-based company has posted two negative surprises in the preceding four quarters while it beat and met the Zacks Consensus Estimates on two other occasions.

First Quarter Revisited

Patterson posted tepid first-quarter fiscal 2012 results with earnings per share of 42 cents trailing both the Zacks Consensus Estimate and the year-ago earnings. Profit clipped roughly 10% year over year on account of charges related to the company’s Employee Stock Ownership Plan (“ESOP”).

Revenues fell 0.3% year over year to $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%.

Patterson witnessed growth across the board in the quarter on a comparable basis. Revenues from its core Dental Supply business rose 4% year over year on a comparable basis with higher dental equipment and software sales contributing to the growth. Dental equipment sales were boosted by healthy sales from the company’s CEREC dental restoration systems and digital imaging products.

Sales from the Webster Veterinary Supply segment jumped 8% on a comparable basis, boosted by solid sales of consumable supplies and veterinary equipment and software. Revenues from the Rehabilitation Supply business soared 12%, driven by DCC Healthcare acquisition and favorable foreign exchange translation. Patterson reaffirmed its earnings per share forecast for fiscal 2012 which is still expected between $1.90 and $2.00.

Estimate Revisions Trend

Agreement

Estimates for the second quarter demonstrate a relative lack of activity with 2 analysts (out of 13) having lowered their forecasts over the past month with none moving in the reverse direction. For fiscal 2012, 1 analyst (out of 13) has reduced his/her estimate over the last 30 days with no positive revisions. There were no movements in either direction for both second quarter and fiscal 2012 over the past week.

Magnitude

Given the limited movements, estimate for the second quarter has been static over the last 7 and 30 days. A similar trend applies to fiscal 2012. The current Zacks Consensus Estimate for fiscal 2012 is $1.94, representing an estimated 2.73% year-over- year increase.

Neutral on Patterson

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

Patterson’s continued investments in infrastructure should boost operational efficiencies. Moreover, the company is exploring lucrative acquisition deals to strengthen its market position and geographic reach. Patterson, in its first quarter earnings call, announced the purchase of veterinary distributor, American Veterinary Supply Corporation, serving roughly 2,000 veterinary practices and hospitals in the New York metropolitan area with sales of $25 million.

Patterson should benefit from the gradual recovery in the dental market and the rebounding dental equipment business, assisted by the promotional initiatives. Revenues from new technology equipment are growing at a healthy pace as dentists continue to switch from film to digital radiography. Patterson is investing on technology upgrades to its CEREC platform, helping it to expand the associated customer base.

The company’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 (HSIC). The company’s back-to-back acquisitions also lead to substantial integration risk. Moreover, promotional spending and charges associated with ESOP are expected to weigh on earnings in fiscal 2012 and beyond.

Our long-term Neutral recommendation on the stock is in agreement with a Zacks #3 Rank, which translates into a short-term Hold recommendation.