Pat McKeough recently replied to an Inner Circle member looking for an opinion on this distributer of dental and animal health products. It’s primed to benefit from two growing trends, says Pat, but it faces competition.
Q: Hello Pat & Team: What is your take on Patterson Companies (Nasdaq: PDCO)? Cheers.
A: PATTERSON COMPANIES (symbol PDCO on Nasdaq; www.pattersoncompanies.com) distributes products for the dental and animal health industries.
Patterson Dental provides a wide range of one-time and limited use dental products throughout North America. That also includes other equipment, software and services used by dentists and dental laboratories.
Patterson Animal Health is a leading distributor in the U.S. and U.K. of one-time and limited use veterinary supplies as well as equipment, software, diagnostic products, vaccines and pharmaceuticals.
The dental business generates 43% of Patterson’s overall revenue and has a 33% share of the North American dental market. The animal health business accounts for 57% of the company’s overall revenue. It has a 25% share of the U.S. companion animal (pet) health market and 40% of the U.K.’s.
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Patterson Companies acquired Animal Health International in June 2015 for $1.0 billion. The acquisition doubled its veterinary business. Animal Health International is a leading animal health distribution company in the U.S. It distributes products for more than 1,000 manufacturers focused on companion animal and production animals (equine, beef and dairy cattle, poultry and swine).
In the three months ended October 29, 2016, Patterson’s revenue rose 2.1%, to $1.42 billion from $1.39 billion a year earlier. Excluding currency changes, it rose 4.1%. Sales were flat in the dental area, but increased in the companion animal and production animal segments.
Excluding one-time items, earnings in the quarter were unchanged from $0.56 per share a year earlier. The company holds cash of $110.4 million, or $1.13 a share. Its long-term debt of $1.0 billion is a reasonable 23.8% of its market cap.
Patterson Companies announced in November 2016 that it would end an exclusivity agreement with Dentsply Sirona (symbol XRAY on Nasdaq) to distribute the manufacturer’s entire product line to U.S. dental practices. The agreement will end in September 2017. As a result, Patterson will take a non-cash, one-time charge of $22 million, or $0.23 a share. Meanwhile, the distributor has entered into a new relationship with Heartland Dental, the largest dental service organization in the U.S. Heartland supports more than 1,100 dentists.
With this new contract, Patterson replaces dental supply giant Henry Schein (symbol HSIC on Nasdaq) as Heartland’s supplier. The deal significantly raises Patterson’s profile in the industry.
The U.S. dental products market is highly competitive. However, it’s increasing, especially as the North American population ages. As a segment of the animal health industry, the pet-products market is also expanding as pet ownership rises. In addition, global demand for meat continues to rise as the middle class increases. That expansion helps to drive demand for the production-animal supplies Patterson distributes. Overall, those trends should push demand for the company’s antibiotics and vaccines.
The stock trades at 17.8 times the $2.44 a share that Patterson Companies is forecast to earn this year. The shares yield 2.2%.
Inner Circle recommendation: Patterson Companies is okay to hold.
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