Morningstar | Patterson's 3Q Results Remain Mixed Amid Persistent Dental Market Headwinds
Patterson reported mixed fiscal 2019 third-quarter results. We may slightly reduce our fair value estimate to reflect the company's persistent dental consumables weakness, but we are leaving our narrow moat rating intact. Management slightly narrowed its fiscal 2019 adjusted EPS guidance to $1.40-$1.45, which is slightly below our estimate of $1.46. While we are encouraged by Patterson's continued efforts to expand its private-label businesses, we remain concerned about long-term dental headwinds.Patterson's dental business realized roughly 1% internal sales growth overall thanks to robust equipment and software growth, but consumables continued to weigh on segment performance. The recent launch of Dentsply Sirona's Primescan intraoral scanner helped Patterson realize 5.6% growth in equipment sales, helping offset the company's 1.9% decrease in dental consumables sales versus the year-ago period. While the company saw its first quarter of year-over-year dental revenue growth in more than two years, we remain concerned about long-term competitive pricing pressures in the market.
Separately, Patterson's animal health top-line performance during the quarter remained solid. The segment posted 2.8% internal year-over-year sales growth compared with the year-ago period, thanks in part to healthy private-label product growth. We still would not be surprised to see the company 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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