Patterson Companies (PDCO) Misses On Q3 Earnings, Cuts View

Patterson Companies Inc. (NASDAQ:PDCO) reported adjusted earnings of 43 cents per share in third-quarter fiscal 2018, missing the Zacks Consensus Estimate of 51 cents. Earnings fell 25.9% year over year.

Net sales dipped 1.6% from the year-ago quarter to $1.375 billion, which beat the Zacks Consensus Estimate of $1.382 billion.

Adjusting the effects of foreign currency exchange, sales declined 2.7% on a year-over-year basis.

Decreased sales and gross margin-compression marred the company’s results in the reported quarter.

Patterson Companies, Inc. Price and Consensus

Patterson Companies, Inc. Price and Consensus | Patterson Companies, Inc. Quote

Patterson Companies has a Zacks Rank #2 (Buy).

Segmental Analysis

The company currently distributes its products mainly through two subsidiaries — Patterson Dental and Patterson Animal Health.

Dental Segment

This segment provides a virtually complete range of consumable dental products, equipment, software, turnkey digital solutions and value-added services to dentists and dental laboratories throughout North America.

In the third quarter, dental sales (42% of total sales) declined 8.1% at cc year over year to approximately $577.9 million. Changes in sales force, disruptions from enterprise resource planning implementation and the expansion of the company’s digital equipment portfolio marred revenues in the segment

Dental Consumable

Sales in the segment were $302.3 million, down 7.4% year over year.

Dental Equipment & Software

Sales at the segment declined 10.6% on a year-over-year basis to $207 million.

Other Services and Products

This segment is primarily composed of technical service, parts and labor, software support services and office supplies decreased 3.4% on a year-over-year basis to $65.6 million.

Animal Health Segment

This segment is a leading distributor of products, services and technologies to the production and companion animal health markets in North America and the U.K.

Coming to the third-quarter performance of the platform (58% of total sales), sales increased almost 4.2% at cc on a year-over-year basis to $794.9 million.

Global companion animal sales inched up 0.4%. Production animal sales increased 8.8%, reflecting strong performance across swine and beef-cattle segment.

Margin Analysis

Gross profit in the reported quarter was $294.7 million, down 10.6% year over year. As a percentage of revenues, gross margin contracted 200 basis points (bps) to 21.4% in the quarter.

Operating income in the third quarter was $50.04 million, up 7.5% year over year. . As a percentage of revenues, operating margin expanded 31 bps to 21.4% in the quarter.

Share Repurchase Update

Patterson Companies repurchased approximately 0.4 million shares of outstanding common stock for $13.5 million in the reported quarter. The company also paid $24.7 million in cash dividends to shareholders.

Guidance Downbeat

The company expects adjusted earnings per share for fiscal 2018 in the range of $1.65-$1.70 per share, much lower than the previously issued range of $2.00-$2.10.

Patterson Companies expects deal amortization expenses of $26.9 million or 29 cents per share.

The company estimates integration and business restructuring expenses at $5.7 million or 6 cents per share.

Our Take

Lackluster sales and earnings performance dampened Patterson Companies’ fourth-quarter results. However, we are upbeat about the company’s Animal Health segment that has been performing well lately. The company 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 growth catalysts.

On the flip side, a downbeat guidance indicates looming concerns ahead. Decreasing revenues in the dental segment is another headwind. The recent decline in the segment is driven by decreased sales of CEREC and digital technology products. Management expects headwinds in the technology-based equipment business to persist through fiscal 2018.

Key Picks

Other top-ranked stocks that reported solid results this earnings season are PetMed Express (NASDAQ:PETS) , PerkinElmer (NYSE:PKI) and Becton, Dickinson and Company (NYSE:BDX) . While PetMed sports a Zacks Rank #1 (Strong Buy), PerkinElmer and Becton, Dickinson carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported third-quarter fiscal 2018 adjusted earnings per share of 44 cents, up 88.3% from the prior-year quarter. Revenues rose 13.7% to $60.1 million.

PerkinElmer posted fourth-quarter 2017 adjusted earnings per share of 97 cents. Adjusted revenues were approximately $641.6 million, up from $567 million a year ago.

Becton, Dickinson reported first-quarter 2018 adjusted earnings per share of $2.48, up 3.9% at constant currency. Revenues totaled $3.08 billion, up 3.7% at constant currency.

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