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Morningstar | Patterson Posts Mixed 4Q Results Alongside Tepid Fiscal 2020 Guidance. See Updated Analyst Note from 27 Jun 2019

Patterson reported mixed fiscal 2019 fourth-quarter results. We may slightly reduce our fair value estimate as we incorporate management's lower-than-expected 2020 guidance, and we are leaving our no-moat rating intact. Management issued fiscal 2020 adjusted EPS guidance of $1.33-$1.43 which is slightly below our prior estimate of $1.47. While we are encouraged by Patterson's continued efforts to manage costs, we remain concerned about long-term dental headwinds.

Patterson's dental business held roughly 4.2% internal sales growth overall thanks mostly to broad equipment and software growth. The category benefited from robust technology demand during the quarter, which translated into double-digit growth in both the CAD/CAM and core equipment categories. Meanwhile, dental consumables continued to weigh on performance, with an internal sales decline of 0.9% versus the year-ago period but continued with its positive sequential growth trend. Patterson's strategic focus on its private label consumable business is appropriate in our view, but we still remain concerned about long-term competitive pricing pressures in the broad dental market.

Patterson's animal health top-line performance during the quarter remained solid. The segment posted 4.1% internal year-over-year sales growth compared with the year-ago period, thanks to solid growth in both the companion and production animal businesses. We note that annual animal health revenue growth continues to outpace its higher-margin dental counterpart, thus contributing to management's relatively tepid 2020 gross margin expectations. We still would not be surprised to see the company spin out or sell the animal health business, which would bolster the company's ability to focus on relatively more attractive dental categories.