We reiterate our Neutral recommendation on
Patterson Companies, Inc.
), a leading distributor of dental, veterinarian and rehabilitation
Patterson's first quarter fiscal 2013 adjusted earnings of 48 cents
per share missed the Zacks Consensus Estimates by a penny. Adjusted
earnings include Employee Stock Ownership Plan ("ESOP") related
charges, but exclude an incremental interest expense of $3.2
million associated with the company's debt issuance in the third
quarter of 2012. Including the interest expense adjusted earnings
were 45 cents per share.
Revenues for the first quarter increased 5% year over year to
$889.2 million, comfortably surpassing the Zacks Consensus Estimate
of $883 million. Solid CEREC equipment sales significantly
contributed to the growth of the core Patterson Dental business,
while high-margin consumable sales remain a drag.
The Veterinary business is benefiting from the American
Veterinary acquisition. However, health care reform related
uncertainties continue to plague Patterson Medical.
Profit in the reported quarter dropped 2.2% year over year to $47.5
million (or 45 cents a share). The company's profit slipped on
account of margin contraction due to adverse sales mix.
Patterson provides a wide range of consumable supplies, equipment
and software, and value-added services to its customers. The
company's wide range of products hedges it from any meaningful
sales shortfall in case of an economic downturn.
The company remains committed to delivering incremental returns to
investors by leveraging earnings power. Patterson repurchased
roughly 1.1 million shares in the first quarter under its 25
million share buyback program. About 10 million shares are still
available for repurchase before the authorization expires in 2016.
Patterson depends heavily on strategic alliances and acquisitions
for its growth. In June 2012, Patterson Dental became the exclusive
Sirona Dental Systems
), a leading dental technologies company. The alliance further
bolsters Patterson Dental's leading position in the North American
dental distribution business. The Omnicare camera for the CEREC
system, developed by Sirona and to be distributed by Patterson, is
the latest growth driver for the company.
More recently, Patterson scooped up Iowa Dental Supply, LLC (IDS),
a full service distributor of dental products. With IDS generating
annual revenues of $13 million in 2011, management at Patterson
Dental expect the deal to be modestly accretive in fiscal 2013.
However, Patterson needs to successfully integrate the acquired
businesses and achieve operational synergies from these
transactions so that these do not turn out to be a waste of
Patterson has a significant key supplier concentration. Loss of
relationship with these vendors will disrupt the supply of raw
materials, which in turn will decrease sales of Patterson
products. Sales from the Veterinary business were affected by
a change in a distribution agreement related to nutritional
offerings in the most recent quarter.
Patterson faces significant competition especially in the U.S.
dental products distribution industry. The company competes
Henry Schein Inc.
) in the dental market.
We remain cautious about intense competition, currency
fluctuations and the overall weak macroeconomic conditions. We
currently have a Neutral recommendation on the stock, which carries
a short-term Zacks #3 Rank (Hold rating).
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