Patterson Retained at Neutral

We reiterate our recommendation for Patterson Companies Inc. ( PDCO - Analyst Report ) at Neutral. Its second quarter fiscal 2013 adjusted earnings of 44 cents per share (up 2.3% year-over-year) missed the Zacks Consensus Estimate of 49 cents.

Sales for the fiscal second quarter edged up 1% year over year to $867.2 million, trailing the Zacks Consensus Estimate of $894 million. Sales were adversely affected by soft dental equipment sales (including chairs and lighting), partially offset by strong technology equipment sales. However, the Veterinary business contributed significantly to total sales.

Revenues from the core Patterson Dental remained approximately flat year over year at $549.1 million. Within Patterson Dental, sales of consumable and printed products inched up 1% to $315.4 million in the quarter. Sales from the equipment and software offerings unexpectedly dropped 3.2% to $169.3 million. Higher demand for the CEREC system, which has been incorporated with the latest Omnicam camera, was constrained by limited product availability. This offset higher technology products sales. Other services and products grew 1.6% year over year to $64.5 million.

Revenues from the Webster Veterinary segment grew 6.8% to $184.4 million. Internally-generated sales jumped 13% in the reported quarter. Revenues from Patterson Medical segment remained flat year over year at $133.7 million due to lower equipment sales. Surgical Synergies, the company acquired by Patterson in April 2012, contributed 1% to the sales growth of this business segment. This division’s equipment franchise continues to be adversely impacted by the uncertainties related to the U.S. health care system.

For fiscal 2013, Patterson lowered its earnings forecast to the range of $2.00 to $2.06 per share from the earlier range of $2.10 to $2.16 per share due to the company’s disappointing second-quarter results as well as the persisting macroeconomic uncertainties.

Patterson provides a wide range of consumables, equipment and software, and value-added services to its customers. Patterson competes head-to-head with Henry Schein Inc. ( HSIC - Snapshot Report ) in the dental market.

Patterson Dental is the company’s largest business segment and one of the two largest distributors of dental products in North America. The recent acquisition of Iowa Dental Supply, LLC (IDS), a full service distributor of dental products, will likely boost Patterson Dental’s foothold in the mid-western U.S. market and provide a competitive edge as well.

Moreover, the alliance with Sirona Dental Systems Inc. ( SIRO - Snapshot Report ) , a leading dental technologies company, further bolsters Patterson Dental’s leading position in the North American dental distribution business. The Omnicam camera for the CEREC system, developed by Sirona and to be distributed by Patterson, is the latest growth driver for this product line.

However, the company remains affected by tough macroeconomic issues in North America and international markets. It is also facing internal operational shortcomings, which need to be addressed. The stock carries a short-term Zacks #4 Rank (Sell).