Patterson Companies, Inc.’s PDCO broad product line is driving its prospects. The company reported robust revenue growth for first-quarter fiscal 2023, aided by a solid dental market. The trend is expected to continue. However, supplier concentration issues and stiff competitive forces persist.
So far this year, this Zacks Rank #3 (Hold) stock has declined 11.4% compared with 13.8% fall of the industry and the S&P 500’s 18.2% decline.
This renowned global dental and animal health company has a market capitalization of $2.56 billion. The company’s earnings are estimated to continue their strong growth for the next five years at an annual rate of 9.6%. Patterson Companies’ earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed once, delivering a surprise of 9.25%, on average.
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Let’s delve deeper.
Broad Product Spectrum: We are optimistic about Patterson Companies’ wide range of consumable supplies, equipment and software, and value-added services. A notable offering from the company is a private-label brand named Pivotal (introduced during first-quarter fiscal 2020). The company continues adding SKUs to its broader private-label portfolio. Patterson Companies’ NaVetor is an integrated cloud-based veterinary practice management software for its Animal Health segment (launched in fiscal 2019).
Dental Market Holds Promise: Gradual recovery in the dental market and the rebounding dental equipment business (especially in North America), assisted by promotional activities, are expected to be advantageous for Patterson Companies. Per a report by Verified Market Research, the dental equipment market was valued at $7.41 billion in 2020 and is projected to reach $10.25 billion by 2028 at a CAGR of approximately 4.8%. Although sales at this segment were down 8.1% year over year during first-quarter fiscal 2023, the company’s field sales, service and support teams remain committed to delivering value to its customers and business partners, thereby driving solid operational excellence.
Solid Prospects of the Animal Health Unit: Patterson Companies' growing Animal Health unit is a key long-term growth driver. Management at Patterson Companies expects solid margin improvement in the Animal Health unit through stronger partnerships with product manufacturers and strong sales execution. Both the company’s companion animal and production animal businesses are anticipated to maintain sustained growth. In fact, the company is optimistic that the Animal Health business is well-poised to drive the top line and, thereby, margins in the near term.
On the first-quarter fiscal 2022 earnings call, the company stated that it had monetized a portion of its investment in Vetsource during this period, thereby leading to an investment gain. In the first quarter of fiscal 2023, the segment registered internal sales growth of 5.7%, owing to sustained strength in the production animal business. The Animal Health segment delivered gross margin and operating margin improvement in the quarter under review on the back of higher sales growth with vendor partners, improved product mix with solid product sales, private label products, equipment and software, and a team focused on expense discipline.
Stiff Competition in the Niche Space: The U.S. dental products distribution industry is highly competitive and consists chiefly of national, regional and local full-service and mail-order distributors. Patterson Companies faces competition not only from other national and full-service firms but also from at least 15 full-service distributors that operate on a regional level besides hundreds of small local distributors. Patterson Companies needs to consistently introduce products to withstand competitive pressure. Failure to do so can dilute the company’s market share.
Supplier Concentration Issues: Patterson Companies faces significant key supplier concentration. The company’s top 10 supply vendors account for more than 40% of its cost of dental products sold in a fiscal year. The loss of relationship with these vendors will disrupt the supply of raw materials, which, in turn, will lead to lower sales. A prolonged period of economic instability could reduce customers’ ability to make payments.
Patterson Companies is witnessing a negative estimate revision trend for fiscal 2023. In the past 60 days, the Zacks Consensus Estimate for its earnings in fiscal 2023 has decreased 0.9% to $2.28 per share.
The Zacks Consensus Estimate for the company’s second-quarter fiscal 2023 revenues is pegged at $1.69 billion, suggesting a 2.3% improvement from the year-ago quarter’s reported number.
Patterson Companies, Inc. Price
Patterson Companies, Inc. price | Patterson Companies, Inc. Quote
Stocks to Consider
A few better-ranked stocks in the broader medical space that investors can consider are ShockWave Medical SWAV, AMN Healthcare Services AMN and McKesson MCK. While ShockWave Medical and AMN Healthcare Services both sport a Zacks Rank #1 (Strong Buy), McKesson carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
ShockWave Medical’s earnings per share estimates have improved from $2.02 to $2.57 for 2022 and from $2.95 to $3.42 for 2023 in the past 60 days. SWAV has gained 63.4% so far this year.
ShockWave Medical delivered an earnings surprise of 180.14% on average in the last four quarters.
Estimates for AMN Healthcare Services have improved from earnings of $10.41 to $11.26 for 2022 and from $7.94 to $8.30 for 2023 in the past 60 days. AMN stock has declined 12.8% so far this year.
AMN Healthcare Services delivered an earnings surprise of 15.66% on average in the last four quarters.
McKesson’s earnings per share estimates have improved from $23.26 to $24.25 for fiscal 2023 and from $25.41 to $26.04 for fiscal 2024 in the past 60 days. MCK has gained 37.4% so far this year.
McKesson delivered an earnings surprise of 13%, on average, in the last four quarters.
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