On Jul 3, we retained our Neutral recommendation on Patterson Companies Inc. (PDCO), following its modest fourth-quarter fiscal 2013 results. Although the core Dental business witnessed moderate improvement, tempered sales of the Vet and Medical businesses disappoint us.
Why the Retention?
On May 23, Patterson posted fourth-quarter fiscal 2013 earnings of 62 cents per share, up 6.9% year over year. Earnings were in line with the Zacks Consensus Estimate. Revenues grew 3.1% to $964.9 million, but were lower than the Zacks Consensus Estimate of $967 million.
Following the release of the quarterly results, the Zacks Consensus Estimate for 2014 dropped 2.7% to $2.18 per share. The Zacks Consensus Estimate for 2015 also declined significantly (down 4%) to $2.41.
We are impressed with the improvement in the core Dental business on the back of higher technology equipment sales. Although Dental consumable sales were up in the quarter, it is too early to state that the underlying market has recovered. We are also upbeat regarding the distribution agreement with Sirona and contribution from new products, including CEREC.
Additionally, Patterson remains committed to leveraging investor return through dividend hikes and share repurchases.
However, health care reform related uncertainties continue to plague Patterson Medical. The Veterinary business is benefiting from increasing demand in the U.S. but needs to address its internal issues to avoid losing market share. Continued decline in operating margin also concerns us. We remain cautious about intense competition and an uncertain macro economy.
Other Stocks to Consider
While we see no clear directional pressure on Patterson, companies like Becton, Dickinson and Company (BDX), CONMED (CNMD) and The Cooper Companies (COO) are expected to do well in the medical industry. All these stocks carry a Zacks Rank #2 (Buy).
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