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Patterson Companies, Inc. (PDCO - Analyst Report), a leading distributor of dental, veterinarian and rehabilitation medical supplies, is scheduled to report its second-quarter fiscal 2014 earnings on Nov 21, 2013. Last quarter, it had posted a negative surprise of 6.25%. Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Patterson began the fiscal year on a disappointing note, reflecting a challenging macro environment. The company had missed the Zacks Consensus Estimate at both fronts in the fiscal first quarter.

Declining revenues from the core Patterson Dental segment due to drop in sales of equipment and software offerings are the prime cause of concern. However, management asserts that the dental equipment business will deliver incremental returns for the rest of fiscal 2014 on the back of new products and rising demand. We note that Patterson’s peer Henry Schein, Inc. (HSIC - Analyst Report) had reported a 5.7% year-over-year rise in revenues from its global Dental business in the last reported quarter.

Moving on, Patterson’s Veterinary business is growing at a healthy pace and we believe that this division should continue to grow on the back of new products and the NVS acquisition. PDCO’s peer, MWI Veterinary Supply, Inc. (MWIV - Analyst Report), a U.S.-based veterinary products company, reported encouraging top-line growth of 9.7% in its fiscal 2013 fourth-quarter results declared on Nov 7.

However, Patterson’s margins remain under pressure. Despite its long-term benefits, the decision to divest certain non-core products from the Patterson Medical unit is likely to accelerate operating expenses in the near term. However, the Medical business is geared to grow in the long-term on the back of its advanced products portfolio as well as underlying favorable demographics.

Earnings Whispers?

Our proven model does not conclusively show that Medtronic is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Most Accurate estimate stands at 47 cents while the Zacks Consensus Estimate is pegged higher at 48 cents. Hence the difference is -2.08%.

Zacks Rank #4 (Sell): Patterson’s Zacks Rank #4 when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

However, a company in the medical product industry that, as per our model, has the right combination of elements to post earnings beat this quarter is:

Cyberonics Inc. (CYBX - Analyst Report), earnings ESP of +2.04% and a Zacks Rank #3 (Hold).
 

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