Earnings Scorecard: Patterson

Patterson Companies’ ( PDCO - Analyst Report ) third-quarter fiscal 2012 results have drawn somewhat mixed reaction among the analysts. The company’s profit for the quarter dipped 4% year over year on account of costs associated with its Employee Stock Ownership Plan (“ESOP”).

Revenues climbed 8.5% year over year as Patterson saw higher sales across its Dental Supply and Veterinary Supply divisions in the quarter, which more than offset a decline in the Rehabilitation Supply unit.

Highlights from the Quarter

Revenues from Patterson’s core Dental Supply division rose 9% as the company registered healthy revenues from its dental equipment business in the quarter riding on a double-digit growth in CEREC chair-side restoration system and digital imaging product sales.

Webster Veterinary Supply division’s sales surged roughly 17%, buoyed by the contributions of American Veterinary Supply Corporation, a veterinary distributor which Patterson bought in August 2011.

Patterson Medical was the weak spot in the quarter with sales declining 2%, hit by lower equipment and software sales, which clipped roughly 10%. The company narrowed its earnings guidance for fiscal 2012 to a range of $1.90 to $1.94 from its prior view of $1.90 to $1.97.

We have discussed the quarterly results at length here: Patterson Co. Tops, Snips View

Agreement – Estimate Revisions

Annual estimates for Patterson elicit fairly mixed analysts reaction. Out of 13 analysts currently covering the stock, 4 have trimmed their forecasts for fiscal 2012 over the past week and month with 2 moving in the opposite direction over these timelines.

A somewhat similar trend is witnessed for fiscal 2013 with 3 analysts (out of 14) having lowered their estimates with 4 positive revisions over the last 7 and 30 days, thereby lacking any comprehensive directional consensus. The bearishness appears to reflect the company’s guidance revision.

Magnitude – Consensus Estimate Trend

Estimate for fiscal 2012 has reduced by a penny over the past week and month. Similarly, estimate for fiscal 2013 has gone down by a cent over the past 7 and 30 days. The current Zacks Consensus Estimates for fiscal 2012 and 2013 are $1.91 and $2.13, respectively.

Neutral on Patterson

Patterson, which offers a wide range of consumables, equipment and software and value-added services, should benefit from improving North American dental industry fundamentals.

The company is exploring lucrative acquisition deals to strengthen its market position and geographic reach. Moreover, its sustained investment in infrastructure should boost operational efficiencies.

Patterson is investing in technology upgrades to its CEREC platform, helping it to increase the associated customer base. Underlying demand for CEREC has been healthy, boosted by the 4.0 software. Adoption of new technology equipment (including CEREC and Schick digital x-ray) is expected to grow as dentists continue to spend on switching from film to digital radiography.

The company remains upbeat about the prospects of its dental equipment business (especially CEREC) and its move to boost promotional activities is expected to contribute to higher demand for this product category moving ahead.

Patterson 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 despite the unfavorable impact of the austerity measures in the U.K and current regulatory uncertainties in the U.S. The division should benefit from the synergies of acquisitions.

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

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

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/