Patterson Companies Dental Business Dull, Competition Rife

On Nov 24, we issued an updated research report on Patterson Companies, Inc. (NASDAQ:PDCO) . A rapidly changing healthcare environment in the United States, unfavorable price movements and a competitive dental products distribution industry pose significant challenges for Patterson Companies.

Patterson carries a Zacks Rank #5 (Strong Sell). The estimate revision trend for Patterson Companies has been unfavorable. For the current year, eight analysts moved south compared to no movement in the opposite direction over the last month. As a result, the Zacks Consensus Estimate for full-year earnings fell to $2.09 from $2.29.

The company exited the second quarter on a tepid note recently. Further, a downbeat guidance and lackluster performance by the dental segment indicate looming concerns. In the quarter, dental sales (40% of total sales) declined 8.4% at cc year over year to approximately $553.6 million. The decline at the segment was caused by decreased sales of CEREC and digital technology products.

Management expects headwinds in the technology-based equipment business to persist through fiscal 2018, adding to our concerns. Patterson’s stock is slightly expensive at the moment. A comparative analysis of the company’s forward P/E (TTM basis) multiple reflects a relatively gloomy picture that might be a concern for investors.

Cutthroat competition in the U.S. dental products distribution industry is a major dampener. Notably, Patterson faces serious competition from at least 15 full-service distributors (that include Henry Schein (NASDAQ:HSIC) Dental, a unit of Henry Schein) and numerous small and local distributors.

However, we are upbeat about the company’s Animal Health segment that witnessed strong sales last quarter. Patterson provides a wide range of consumable supplies, equipment, software and value-added services. The company’s broad spectrum of products cushions it against economic downturns in the MedTech space. We believe a diversified product portfolio, strong veterinary business prospects, accretive acquisitions and strategic partnerships are key catalysts.

Patterson’s price movement in the past three months has been disappointing. The company represented a negative return of almost 6.3%, comparing unfavorably with the broader industry’s addition of around 5.2%.

Key Picks

A few better-ranked stocks in the broader medical sector are PetMed Express, Inc. (NASDAQ:PETS) , Myriad Genetics, Inc. (NASDAQ:MYGN) and Luminex Corp. (NASDAQ:LMNX) . While PetMed and Myriad sport a Zacks Rank #1 (Strong Buy), Luminex carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed has a long-term expected earnings growth rate of 10%. The stock has rallied roughly 76.8% in a year.

Myriad Genetics has a long-term expected earnings growth rate of 15%. The stock has gained 12.5% over the last three months.

Luminex has a long-term expected earnings growth rate of 16.3%. The stock has gained 15.5% over the last three months.

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