Patterson Companies: Growth and income buy

The medical supply company rides the growing veterinary and dental markets.

By Jul 30, 2012 1:51PM

Image: Dentist working on a computer © Andersen Ross/Brand X Pictures/Getty ImagesZacks Equity Research

Patterson Companies (PDCO) has risen nearly 19% since January 2012 and is hovering around its 52-week high of $35.66. This distributor of dental, veterinarian and rehabilitation medical supplies exited fiscal 2012 on a high note with both sales and earnings sailing past Zacks Consensus Estimates on the back of a strong North American dental market.


Along with these positives, this Zacks No. 2 Rank ("buy") company's 1.6% dividend yield and a continuous share buyback program make its stock a good pick for investors looking for both growth and income.

On May 24, Patterson, headquartered in St. Paul, Minn., reported fourth-quarter fiscal 2012 adjusted earnings per share (EPS) of 58 cents, beating the Zacks Consensus Estimate by a penny and the year-ago earnings of 53 cents per share. For fiscal 2012, adjusted earnings of $1.92 per share beat the Zacks Consensus Estimate by a penny and exceeded the prior year's EPS of $1.89.

Revenue for the fourth quarter rose 6% year over year to $936.3 million, beating the Zacks Consensus Estimate of $914 million. The upside was driven by robust performance across the three segments -- Dental Supply (grew 4%), Rehabilitation Supply (3%) and Veterinary Supply (13%). Sales from the Webster Veterinary unit were boosted by the August 2011 acquisition of American Veterinary Supply Corporation that accounted for approximately 2% of the unit's sales growth.

For the fiscal year, revenues grew 3.5% to $3,535.7 million, slightly above the Zacks Consensus Estimate of $3,510 million. An additional sales week in the first quarter of fiscal 2011 had an adverse impact on year-over-year comparison by approximately 2 percentage points.

Gross margin dropped 90 basis points (bps) year over year to 33.5% in the fourth quarter. In addition, a 5.5% rise in operating expenses to $210.9 million led to an 80 bps contraction in operating margin to 11%.

For fiscal 2013 the company forecasts EPS between $2.10 and $2.16, representing year-over-year growth of 9.4% to 12.5%. While the dental consumables and equipment markets are expected to grow by 2% to 3% and 5 to 7%, respectively, the companion pet veterinary market is slated for 3 to 4% growth during fiscal 2013. However, the global rehabilitation market is expected to remain flat.

Estimates inch up

Patterson is expected to report first quarter fiscal 2013 results on Aug. 23, 2012. The Zacks Consensus Estimate for fiscal 2013 remained unchanged at $2.14, slightly below the company's guidance. However, the Zacks Consensus Estimate for fiscal 2014 has increased by 2.0% to $2.36 over the last 30 days, representing a year-over-year jump of 10.6%.

Enhancing shareholder value

In March 2012, Patterson hiked its quarterly dividend by 16.7% to 14 cents per share, representing a decent yield of 1.6%. In contrast, the average dividend yield of the industry is only 0.4%. Since the company initiated its dividend in March 2010 with 10 cents per share, dividends have grown at a compound annual growth rate of 18.0%. The company's dividend payout ratio has also gone up from 22.0% in fiscal 2010 to approximately 28.6% in the current fiscal year.

The company returned over $400 million to its shareholders in fiscal 2012 including share buybacks and quarterly dividends.

Attractive valuation

Patterson's valuation looks compelling compared to its peers by most metrics. Based on 2013 earnings estimates, the company is trading at a price-to-earnings (P/E) ratio of 16.40, a nominal discount to the peer group average of 16.52. The price-to-book ratio of 2.83 is at an 8.1% discount to the peer group average of 3.08. Valuation looks attractive with respect to the price-to-sales (P/Sales) ratio as well. The P/Sales ratio of the company stood at 1.09, a 34.7% discount to the peer group average of 1.67.

Chart reflects strength

The stock has been consistently trading above its 200-day moving average since January 19, 2012. Barring occasional pullbacks, the stock has been above its 50-day moving average since the beginning of the year. Patterson, which competes with players such as Henry Schein (HSIC) and MWI Veterinary Supply (MWIV), has also outperformed the S&P 500 since April 30, 2012. The one-year return for the stock is roughly 10.3% compared to a 3.5% return from the S&P 500 index.

Patterson Dental is the company’s largest business segment and one of the two largest distributors of dental products in North America. Patterson is also the only national dealer for A-dec equipment that is the largest manufacturer of dental equipment in the U.S. It has a market capitalization of $3.71 billion.


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