Patterson Companies (PDCO) Q3 Earnings: What's In Store?

Patterson Companies, Inc. (NASDAQ:PDCO) is scheduled to release third-quarter fiscal 2018 results on Mar 1. The company anticipates a decline in the Dental Supply segment — one of its major revenue components. While this can majorly dampen earnings, an expected improvement in Animal Segment operating income should drive results.

Notably, Patterson Companies reported adjusted earnings of 51 cents per share in second-quarter fiscal 2018, missing the Zacks Consensus Estimate of 54 cents. Net sales fell 2.3% from the year-ago quarter to $1.39 billion and lagged the Zacks Consensus Estimate of $1.42 billion.

Let us take a look at how things are shaping up before the release.

Dental-Supply Segment to Decline in Q3

The Zacks Consensus Estimate for the Dental Supply segment is $592 million for third-quarter fiscal 2018. This reflects a decline of almost 5.4% year over year.

The loss of exclusive distribution rights with Dentsply Sirona (NASDAQ:XRAY) forced the company to shift to a new enterprise resource planning system to efficiently manage inventory. However, the system is creating short-term challenges. Undoubtedly, the termination of the contract presents new opportunities for Patterson Companies to expand distribution platform to a wider range of product offerings. However, the company continues to witness heavy initial impact from the loss of this deal.

Patterson Companies, Inc. Price and EPS Surprise

The company’s decision to end exclusive distribution will affect results through fiscal 2018. In fact, dental segment sales have been sluggish over the last couple of quarters. Management has provided a dull guidance for the coming quarters as well.

In the last quarter, dental sales (40% of total sales) fell 8.4% at constant currency (cc) year over year to approximately $553.6 million. The downside was caused by lower sales of CEREC and digital technology products. Management expects headwinds in the technology-based equipment business to persist through fiscal 2018, adding to the company’s woes.

Other Factors at Play

Estimates & Guidance

For the third quarter, the Zacks Consensus Estimate for adjusted earnings is pegged at 51 cents, reflecting a decline of 12.1% year over year. Management anticipates headwinds in its technology equipment business to persist through fiscal 2018. This is primarily because of Patterson Companies’ initiatives to transit its sales model to an expanded technology product portfolio.

Further, the Zacks Consensus Estimate for revenues is pegged at $1.38 billion, showing a decline of 1.1% year over year.

In the last quarter, the company estimated adjusted earnings per share for fiscal 2018 in the range of $2.00-$2.10, way below the previous band of $2.25-$2.40. Patterson Companies expects deal amortization expenses of $25.3 million or 27 cents per share. The company projects integration and business restructuring expenses at $5.3 million or 6 cents per share.

Animal Health Segment

Animal Health is the second important contributor to revenues for Patterson Companies after the dental unit.

Steady growth in this unit is expected to be a long-term growth driver. Management expects solid margin improvement in the segment on the back of enhanced partnerships with product manufacturers and strong sales execution. The Zacks Consensus Estimate for operating income from the Animal Health unit is pegged at $30.9 million, reflecting an improvement of 33.1% from the last quarter.

However, the Zacks Consensus Estimate for net sales is $786 million, reflecting a decline of 4.6% year over year.

Our quantitative model does not show an earnings beat for Patterson Companies this quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. This is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for Patterson Companies is -0.65%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Patterson Companies carries a Zacks Rank #2.

Key Picks

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The Cooper Companies Inc. (NYSE:COO) has an Earnings ESP of +0.04% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

DexCom, Inc. (NASDAQ:DXCM) has an Earnings ESP of +126.5% and a Zacks Rank #3.

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