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Patterson Reiterated at Neutral

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We reiterate our Neutral recommendation on Patterson Companies, Inc. (PDCO - Free Report) , a leading distributor of dental, veterinarian and rehabilitation medical supplies.

The company’s fourth quarter fiscal 2012 adjusted earnings per share of 58 cents beat the Zacks Consensus Estimate by a penny. Revenues for the fourth quarter rose 6% on the back of Veterinary Supply business along with higher consumable sales, especially the Trifexcis product. Patterson Medical sales also showed signs of improvement in the reported quarter.

Patterson’s Rehabilitation Supply business (also known as Patterson Medical) is poised to be a key long-term growth driver for the company. The April 2012 acquisition of Australia-based distributor of rehabilitation, physiotherapy, and mobility products, Surgical Synergies Pty Ltd. will help Patterson Medical establish a presence in Australia and New Zealand.

Although patient demand for dental services was tepid at the height of recession, Patterson should benefit from the gradual recovery in the dental market and the rebounding dental equipment business in North America. We also remain upbeat about the prospects of the dental equipment business (especially CEREC). The company’s focused promotional activities should result in higher demand for this product category moving ahead.

However, consumable sales from the dental business are expected to be a drag due to the weak European economy, high unemployment rate and lack of consumer confidence.

Moreover, the US healthcare reform is likely to adversely affect the company’s Medical business in fiscal 2013 as the recent Supreme Court verdict to support the majority of Obamacare may affect expenditures and reimbursements for its products. In its guidance, the company does not foresee this segment to grow in fiscal 2013.

Additionally, a large percentage of Patterson’s revenues depend on its supply vendors. A loss of relationship with these vendors would disrupt the supply of raw materials for Patterson's products. The company expects a loss of $45 million in its Veterinary business from a change in a distribution deal with a nutritional vendor, from a buy/sell arrangement to an agency arrangement in fiscal 2013.

Patterson faces significant competition, especially in the U.S. dental products distribution industry. The company competes head-to-head with Henry Schein Inc (HSIC - Free Report) in the dental market. Patterson needs to keep on introducing new products in the market to withstand the competitive pressure. Failure to do so will dilute the company’s market share. Currently, the stock carries a Zacks #2 Rank (short-term Buy rating).

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