Patterson Companies Inc (PDCO - Analyst Report), a leading distributor of dental, veterinarian and rehabilitation medical supplies, posted fourth-quarter fiscal 2011 (ended April 30) earnings per share of 53 cents, topping the Zacks Consensus Estimate of 51 cents and the year-ago earnings of 52 cents.
Fourth Quarter Highlights
Profit for the quarter inched up 1.5% year over year on account of higher revenues (up roughly 9%), which comfortably beat the Zacks Consensus Estimate. Revenues were driven by higher sales across the board with Patterson’s dental technology equipment business delivering double-digit growth in the quarter, bouncing back from a soft third quarter.
Patterson’s core Dental Supply business returned to the growth track in the fourth quarter with sales increasing 5%. Dental equipment and software revenues climbed 11%, owing to strong sales of new technology equipment such as CEREC dental restoration systems and digital imaging systems, backed by the company’s promotional initiatives.
The Webster Veterinary Supply segment posted healthy growth (up 13.6%) in the quarter, boosted by higher consumable sales. Revenues from the Rehabilitation Supply business rose 22%, bolstered by the acquisition of DCC Healthcare.
However, margins contracted in the quarter, impacted by spending on promotional activities. The company’s earnings guidance for fiscal 2012 was below the Street view.
We have discussed the quarterly results at length here: Patterson Co. Tops Estimates
Agreement – Estimate Revisions
Despite the forecast-topping results, estimates for Patterson are clearly on the negative side, partly reflecting its earnings outlook. Out of 12 analysts currently covering the stock, eleven have chopped their forecasts for fiscal 2012 over the past month (including 1 over the last week) accompanied by a solitary movement in the opposite direction.
For fiscal 2013, five analysts (out of 10) have lowered their forecasts over the last 30 days (including 1 over the past 7 days) with no positive revisions.
Magnitude – Consensus Estimate Trend
A plethora of negative revisions have led to a decline in earnings estimates for fiscal 2012 by 11 cents over the past month (including a decline of a penny in the past week). Estimates for fiscal 2013 have gone down by 6 cents over the same period (static over the last week). The current Zacks Consensus Estimates for fiscal 2012 and 2013 are $1.97 and $2.19, respectively, representing estimated year -over -year growth of 4.41% and 10.83%.
Neutral on Patterson
Patterson is expected to benefit from improving North American dental industry fundamentals. The company’s sustained investment in infrastructure should boost operational efficiencies. Moreover, Patterson is exploring lucrative acquisition deals to strengthen its market position and geographic reach.
Patterson remains successful in growing revenues on a quarterly basis, driven by double-digit growth at its Rehabilitation Supply unit, which is benefiting from the synergies of acquisitions. The division continues to grow at a healthy quarterly run rate despite the unfavorable impact of the austerity measures in the U.K.
Although patient demand for dental services had been tepid at the height of the recession, Patterson should benefit from the gradual recovery in the dental market and the rebounding dental equipment business moving forward, assisted by the increased technology marketing/promotional activities. The company is upbeat about the prospects of its dental equipment business and envisions high single-digit revenue growth in fiscal 2012.
However, Patterson faces significant competition in the dental market, especially from Henry Schein Inc (HSIC - Analyst Report). The U.S. dental products distribution industry is highly competitive and consists principally of national, regional and local full-service and mail-order distributors.
Although Patterson’s move to beef up promotional activities for its dental technology equipment offerings may eventually bear fruit, higher spending on such programs is dilutive to its earnings and margins.
Moreover, the company’s aggressive acquisition could lead to substantial integration risk. Cost associated with DCC Healthcare integration may also dent its bottom line. This leads us to take a Neutral stance on Patterson. The stock currently retains a Zacks #4 Rank, which translates into a short-term “Sell” recommendation.
About Earnings Estimate Scorecard
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