Morningstar | Patterson's 2Q Results Remain Challenged by Dental Market Headwinds
Patterson's fiscal 2019 second-quarter results were hampered by an unfavorable sales mix and dental segment weakness. We may slightly reduce our fair value estimate to reflect the company's persistent dental weakness, but we are leaving our narrow moat rating intact for now. Management reaffirmed its fiscal 2019 adjusted EPS guidance, and while we are somewhat encouraged by Patterson's continued efforts to stabilize its sales organization, we remain concerned about the company's long-term dental headwinds.Patterson's relative dental weakness stemmed mostly from consumables underperformance. Relative to the year-ago period, the company's dental consumables sales decreased 2.2% while total equipment sales were flat. While the company noted sequential quarterly improvements in both markets, we remain concerned about long-term competitive pricing pressures in the broad dental market. Separately, Patterson's animal health top-line performance during the quarter remained solid. The segment posted 4.5% internal year-over-year sales growth compared with the year-ago period, thanks in part to private-label product growth. We continue to expect Patterson will eventually spin out or sell this segment in order to unlock material value that is currently buried beneath the underperforming dental business.
Patterson Companies is a distributor serving the U.S. and Canadian dental supply and the U.S., Canadian and U.K. animal health supply markets. The company operates through two business units, Patterson Dental and Patterson Animal Health. Patterson Dental provides consumable products, including infection control, restorative materials, hand instruments and sterilization products; technology dental equipment; technology solutions, including practice management software and e-commerce solutions; patient education systems; and office forms and stationery to dentists, dental laboratories, institutions, and other healthcare personnel. Patterson Animal Health is a distributor of animal health products.
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