On Aug 23, Zacks Investment Research downgraded Patterson Companies (PDCO) to a Zacks Rank #3 (Hold) from Zacks Rank #2 (Buy) on the heels of a disappointing first-quarter fiscal 2014 results.
Why the Downgrade?
Patterson reported a disappointing fiscal 2014 first quarter results, reflecting a challenging macro environment. The company delivered negative earnings surprises in 3 out of the last 4 quarters with a negative average surprise of 6.03%.
Patterson’s first-quarter fiscal 2014 earnings per share (EPS) of 45 cents per share was flat year over year and missed the Zacks Consensus Estimate by 3 cents. The company’s planned investment in IT lowered EPS by a cent. In the reported quarter, net income declined 3.4% to $45.9 million from $47.5 million in the year-ago period.
Moreover, revenues for the quarter dropped marginally by 1% to $880.1 million from $889.2 million reported in the first quarter of fiscal 2014. Revenues were considerably lower than the Zacks Consensus Estimate of $918 million.
Revenues from the core Patterson Dental declined 2.3% mainly due to an 11.7% drop in sales of the equipment and software offerings. However, management asserts that the dental equipment business faced difficult year-over-year comparisons and is confident that the business will deliver incremental returns for the rest of fiscal 2014 on the back of new products and rising demand.
PDCO’s margins too remained under pressure in the reported quarter. Moreover, despite its long-term benefits, the decision to divest certain non-core products from the Patterson Medical unit is likely to accelerate operating expenses in the near-term.
Despite these shortcomings, we note that the Veterinary business grew modestly in the quarter, reflecting a tailwind in the underlying market. Moreover, the Medical business is geared to grow in the long-term on the back of its advanced products portfolio as well as underlying favorable demographics.
Other Stocks to Consider
Other medical stocks that are worth considering include MWI Veterinary Supply (MWIV), Align Technology (ALGN) and The Cooper Companies (COO). All these stocks carry a Zacks Rank #2 (Buy).
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