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Patterson Companies' (PDCO) Dental Segment Shows Weakness

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Patterson Companies, Inc. (PDCO - Free Report) has had an unimpressive run on the bourses in the last three months, trading below the industry. Further, lackluster performance in the dental segment along with a downbeat guidance is a concern. The stock has a Zacks Rank #5 (Strong Sell).

The estimate revision trend for Patterson Companies has been dismal. For the current year, eight analysts moved south compared with no movement in the opposite direction over the last two months. As a result, the Zacks Consensus Estimate for full-year earnings fell 9.2% to $2.09.

What’s Not Right in the Dental Segment?

Loss of Distribution Rights

The recent loss of exclusive distribution rights with Dentsply Sirona (XRAY - Free Report) has forced the company to shift to a new enterprise resource planning (ERP) system to efficiently manage inventory. However, the system is creating short-term challenges. Undoubtedly, the termination of the contract presents new opportunities for Patterson Companies to expand distribution platform to a wider range of product offerings. However, the company also witnesses a heavy initial impact from the loss of this deal.

Deteriorating Sales

Patterson Companies’ decision to end exclusive distribution will affect results through fiscal 2018. In fact, the dental segment sales have been sluggish over the last couple of quarters. Management has provided a dull guidance for the coming quarters as well.

In the last quarter, dental sales (40% of total sales) declined 8.4% at cc year over year to approximately $553.6 million. The downside was caused by lower sales of CEREC and digital technology products. Management expects headwinds in the technology-based equipment business to persist through fiscal 2018, adding to the company’s woes.

Competition Rife

Cutthroat competition in the U.S. dental products distribution industry is a major dampener as well. Notably, Patterson Companies faces serious competition from at least 15 full-service distributors that include Henry Schein Dental, a unit of Henry Schein (HSIC - Free Report) , and numerous small and local distributors.

Shares Lack Luster

A rapidly changing healthcare environment in the United States, unfavorable price movements, a competitive dental products distribution industry and integration risks pose significant challenges. Patterson Companies’ price movement in the past three months has been disappointing. The company represented a negative return of almost 5.2%, comparing unfavorably with the industry’s rally of almost 4.7%. In fact, the current level is lower than the S&P 500 index’s return of 7.3% over the same time period.

 

Key Pick

A top-ranked stock in the broader medical sector is PetMed Express, Inc. (PETS - Free Report) . PetMed has a long-term expected earnings growth rate of 10%. This Zacks Rank #1 (Strong Buy) stock has rallied roughly 76.8% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.

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