We reaffirm our Neutral recommendation on Patterson Companies Inc (PDCO), a leading distributor of dental, companion-pet veterinarian and rehabilitation medical supplies in the U.S. and Canada . First-quarter fiscal 2011 (ended July 31, 2010) earnings per share of 45 cents beat the Zacks Consensus Estimate by a penny.
Profit soared 19.6% year-over-year on account of higher sales which climbed roughly 8%, benefited by an extra week in the quarter. However, sales trailed the Zacks Consensus Estimate.
Patterson’s core Dental Supply business posted 6% year-over-year revenue growth, boosted by healthy dental equipment sales (up 13%). Revenues from its Webster Veterinary Supply segment grew 6% in a soft economic backdrop, helped by higher equipment sales. Rehabilitation Supply revenues cruised 17% on the back of acquisitions and contribution from the additional week. The company backed its fiscal 2011 earnings guidance.
Minnesota-based Patterson provides a wide range of consumable supplies, equipment and software and value-added services to its customers. The company operates through three business segments, Dental Supply, Veterinary Supply and Rehabilitation Supply (“Patterson Medical”).
Patterson has been successful in growing revenues over the past few quarters driven by healthy double-digit growth at its Rehabilitation Supply unit. The division is benefiting from the synergies from acquisitions and will continue to explore such lucrative deals in fiscal 2011 to boost market position and geographic reach. Moreover, Dental Supply, the largest contributor to Patterson’s revenues, is expected to benefit from the gradual recovery in the dental market and the rebounding dental equipment business.
However, Patterson faces significant competition, especially in the dental market. The U.S. dental products distribution industry is highly competitive and consists principally of national, regional and local full-service and mail-order distributors. We also remain cautious about the company’s aggressive acquisition strategy to drive growth given the inherent integration risk. Our recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).