Patterson Cos Retained at Neutral

We reaffirm our Neutral rating on the Patterson Companies (PDCO - Analyst Report), a leading distributor of dental, companion-pet veterinarian and rehabilitation medical supplies. The company posted tepid second-quarter fiscal 2012 results with both revenues and earnings missing the Zacks Consensus Estimates.

Profit clipped roughly 8% year over year on account of charges related to the company’s Employee Stock Ownership Plan (“ESOP”). Revenues were essentially flat year over year at $856.9 million.  

Patterson should 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.

The company continues to invest on technology upgrades to its CEREC (chair-side restoration system) platform, helping it to increase associated customer base. Adoption of new technology equipment (including CEREC) is expected to grow as dentists continue to spend on switching from film to digital radiography.

Patterson remains upbeat about the prospects of its dental equipment business and its move to boost promotional activities is expected to contribute to higher demand for this product category in the back half of fiscal 2012.

The company is also investing in technologies to boost the profitability of its veterinary business. Moreover, its Rehabilitation Supply business is poised to be a key long-term growth driver and should benefit from the synergies of acquisitions.

However, Patterson faces significant competition in the dental market, especially from Henry Schein (HSIC - Snapshot Report). Although its move to boost promotion for its dental technology equipment offerings should bear fruit, associated expenses are dilutive to bottom line and margins.

Moreover, charges associated with ESOP are expected to weigh on its earnings in fiscal 2012 and beyond. Our recommendation on the stock is in tandem with a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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