Patterson Companies, Inc.it is (OFSP – Free Report) wide range of products is driving its prospects. The company reported robust revenue growth for the first quarter of fiscal 2023, helped by a strong dental market. The trend should continue. However, problems with supplier concentration and strong competitive forces persist.
So far this year, this Zacks Rank #3 (Hold) stock is down 11.4%, versus the industry’s 13.8% drop and the S&P 500’s 18.2% drop.
This renowned global dental and animal health company has a market capitalization of $2.56 billion. The company’s earnings are expected to continue their strong growth over the next five years at an annual rate of 9.6%. Patterson Companies’ earnings have topped the Zacks consensus estimate in three of the past four quarters and missed once, delivering a surprise 9.25% on average.
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Let’s go deeper.
Large range of products : We are optimistic about Patterson Companies’ wide range of consumables, equipment and software and value-added services. A notable offering from the company is a private label named Pivotal (introduced in the first quarter of fiscal 2020). The company continues to add 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 year 2019).
The dental market keeps its promises: The gradual recovery of the dental market and the rebound of the dental equipment business (particularly in North America), supported by promotional activities, should be beneficial for Patterson Companies. According to 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 with a CAGR of around 4.8%. Although sales in this segment were down 8.1% year-over-year in the first quarter of fiscal 2023, the company’s sales, service and field support teams company remain committed to delivering value to its customers and business partners, driving strong operational excellence.
Solid prospects of the animal health unit: Patterson Companies’ growing animal health unit is a key long-term growth driver. Patterson Companies management expects solid improvement in margins in the animal health unit thanks to stronger partnerships with product manufacturers and strong sales execution. The company’s companion animal and food producing animal businesses are expected to maintain strong growth. In fact, the company is optimistic that the Animal Health business is well positioned to drive revenue and, therefore, margins in the near term.
During the fiscal 2022 first-quarter earnings call, the company said it monetized a portion of its investment in Vetsource during that period, resulting in an investment gain. In the first quarter of fiscal 2023, the segment reported organic sales growth of 5.7%, driven by continued strength in the food producing animal business. The Animal Health segment recorded an improvement in gross margin and operating margin during the quarter under review thanks to higher sales growth with supplier partners, an improved product mix with strong product sales, private label products, equipment and software; and a team focused on spend discipline.
Fierce competition in the niche space: The US dental distribution industry is highly competitive and consists primarily of national, regional and local full-service and mail-order distributors. Patterson Companies faces competition not only from other national and full-service companies, but also from at least 15 full-service distributors who operate regionally in addition to hundreds of smaller local distributors. Patterson Companies must constantly introduce products to withstand competitive pressure. Failure to do so can dilute the company’s market share.
Supplier concentration issues: Patterson Companies faces a significant concentration of key suppliers. The company’s top 10 supply suppliers account for more than 40% of the cost of its dental products sold in a fiscal year. The loss of relationships with these suppliers will disrupt the supply of raw materials, which, in turn, will lead to lower sales. A prolonged period of economic instability could reduce the ability of customers to make payments.
Estimate the trend
Patterson Companies is seeing a negative trend in revising estimates for fiscal year 2023. Over the past 60 days, Zacks’ consensus estimate for its fiscal year 2023 earnings has fallen 0.9% to 2.28 $ per share.
Zacks’ consensus estimate for the company’s revenue in the second quarter of fiscal 2023 is set at $1.69 billion, suggesting a 2.3% improvement from the figure reported a year ago. year.
Actions to consider
A few higher ranked stocks in the broader medical space that investors can consider are Medical ShockWave (SWAV – free report), AMN health services (AMN – free report) and McKesson (MCK – free report). While ShockWave Medical and AMN Healthcare Services both sport a Zacks rank of #1 (strong buy), McKesson carries a Zacks rank of 2 (buy). You can see the full list of today’s Zacks #1 Rank stocks here.
ShockWave Medical earnings per share estimates have risen from $2.02 to $2.57 for 2022 and from $2.95 to $3.42 for 2023 over the past 60 days. SWAV has gained 63.4% so far this year.
ShockWave Medical has recorded an average earnings surprise of 180.14% over the past four quarters.
Estimates for AMN Healthcare Services fell from $10.41 to $11.26 in revenue for 2022 and $7.94 to $8.30 for 2023 over the past 60 days. AMN stock is down 12.8% so far this year.
AMN Healthcare Services has recorded a surprise profit of 15.66% on average over the past four quarters.
McKesson’s earnings per share estimates have fallen 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 has delivered a 13% earnings surprise, on average, over the past four quarters.