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What's in Store for Patterson Companies' (PDCO) Q4 Earnings?

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Patterson Companies, Inc.’s (PDCO - Free Report) fourth-quarter fiscal 2018 results are expected to release on May 24, before the market opens. While results are likely to show a decline in the core Dental segment, growth across other segments is likely to make up to some extent.

The third quarter of fiscal 2018 was a dismal one, with adjusted earnings of 43 cents per share declining 25.9% year over year. Moreover, the figure lagged the Zacks Consensus Estimate of 51 cents. Patterson recorded revenues of $1.375 billion, which also fell shy of the Zacks Consensus Estimate of $1.382 billion. Also, revenues dropped 1.6% from the year-ago quarter.

For the fourth quarter of fiscal 2018, the Zacks Consensus Estimate for revenues is pegged at $1.43 billion, reflecting a year-over-year decline of 1%. The same for earnings per share is pinned at 31 cents, showing a year-over-year decline of 55.1%.

Notably, Patterson has a negative average earnings surprise of 2.8% for the trailing four quarters.

Let’s delve deeper.

Dental Segment in Focus

In the last reported quarter, this segment accounted for 42% of total sales. Revenues in the segment came in at $577.9 million in the quarter, down 8.1% at constant currency (cc). Revenues were marred by changes in sales force, disruptions from enterprise resource planning implementation and the expansion of the company’s digital equipment portfolio.

Moreover, for the quarter to be reported, the Zacks Consensus Estimate for the segment’s revenues is pegged at $574 million, which shows a decline of 5.4% on a year-over-year basis.

Dental Consumables accounted for 22% of the total revenues in the last reported quarter. The segment posted revenues of $302.3 million, down 7.4% year over year.

For the quarter to be reported, the Zacks Consensus Estimate for the sub-segment’s revenues is pinned at $319 million, down 5.9% from the prior-year quarter.

Meanwhile, the Equipment and Software sub-segment accounted for 4.8% of total sales in the fiscal third quarter. The segment posted revenues worth $65.6 million, down 3.4% from a year ago.

Furthermore, for the quarter to be reported, the Zacks Consensus Estimate for the segment’s revenues is fixed at $182 million, down 6.2% year over year.

Other Factors at Play

Guidance Downbeat

Following an unsatisfactory fiscal third quarter, Patterson lowered its guidance for fiscal 2018. The company now expects adjusted earnings per share in the range of $1.65-$1.70, much lower than the previously issued band of $2-$2.10.

Deal amortization expenses of $26.9 million or 29 cents per share are expected in fiscal 2018.

Moreover, the company estimates integration and business restructuring expenses of $5.7 million or 6 cents per share.

ERP Issue

The loss of exclusive distribution rights with Dentsply Sirona has forced the company to shift to a new enterprise resource planning (ERP) system to efficiently manage inventory. The ongoing ERP transition has proven to be disruptive to performance and is likely to pose challenges in the days ahead. In the last reported quarter, ERP issues have dented margins, leading to gross margin contraction of 200 basis points (bps).

Moreover, the Dental segment’s sales were affected by the company’s expanding digital equipment portfolio. Per management, the company’s working capital continues to be impacted negatively by the implementation of the ERP system.

The company is also grappling with certain legislative issues. We believe these headwinds will mar Patterson’s results in the quarter to be reported.

Animal Health Segment

Per management, though Patterson’s core Animal Health segment faced product mix-related challenges in the last reported quarter, it represented 58% of total sales. Furthermore, sales rose 4.2% at cc on a year-over-year basis to $794.9 million.

The Zacks Consensus Estimate for the segment’s fourth-quarter revenues is pegged at $847 million, up 6.5% sequentially. Management expects a sequential upside in sales.

Animal Health consumable is also expected to see a strong fourth quarter. The Zacks Consensus Estimate for the sub-segment’s sales is pinned at $828 million, up 7.3%, sequentially.

What Does Our Model Predict?

Our quantitative model does not show a beat for Patterson this earnings season. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates.

Zacks ESP: The Earnings ESP for Patterson is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Patterson carries a Zacks Rank #4 (Sell).

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post a beat this earnings season.

Quality Systems has an Earnings ESP of +5.00% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

McKesson Corporation (MCK - Free Report) has an Earnings ESP of +0.37% and a Zacks Rank #3.

Medtronic (MDT - Free Report) has an Earnings ESP of +0.12% and a Zacks Rank #3.

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