High-Yield Patterson Companies Is Still A Buy

The Patterson Companies Beats And Raises, Shares Fall 

We’ve had some interest in Patterson Companies, Inc NASDAQ: PDCO because of its high yield, its value, and its position within the market. There is nothing exciting about dental or animal health but it is a steady business and one supported secular trends. Not only are we spending more on ourselves in regards to dental care but the same is true for our pets. These trends aren’t going to produce double-digit organic growth but they are going to sustain growth and healthy dividend payments long into the future. With shares trading near the bottom of a long-term trading range and the stock offering a deep value relative to its 3.3% yield, we can’t help but view this stock as highly buyable for income investors.

Patterson Companies Outperforms On All Metrics 

Patterson Companies had a good quarter of mid-single-digit growth supported by sustained strength in both animal health and dental. The $1.65 billion in revenue is up 6.5% versus last year and beat the consensus by 440 basis points on particular strength in the animal health segment. While dental revenue is up 9.8% versus 2019 it is down YOY and dragging on this quarter’s net. The animal health segment, however, is up 16.2% YOY and 24.3% in the 2-year stack accounting for 62% of the net. Within that, consumables increased by 15.8% while equipment and technology increased by 37.8%.

Moving down the report, the company’s gross margin narrowed but by a much small than expected 80 basis points. SG&A also increased slightly as a percentage of revenue but once again less than expected. The operating margin contracted about 90 basis points which left earnings below last year’s level but better than expected on both a GAAP and adjusted basis. The GAAP $0.49 is down $0.03 from last year but by $0.07 while the adjusted $0.58 is down $0.06 from last year and beat by $0.08. 

Looking forward, the company is expecting to see some strength carry into the coming quarters and has guided the market higher. The company is now expecting to see GAAP and adjusted EPS in a range that is $0.05 higher than previously stated. This puts GAAP EPS in a range of $1.69 to $1.79 and adjusted EPS in a range of $2.00 to $2.10 compared to the Marketbeat.com analyst consensus estimate of $2.03. 

The Patterson Companies Dividend Is Safe 

Patterson Companies first came to our attention as a dividend-grower but that ship has sailed. The dividend environment was disrupted by the pandemic but, unlike some others, Patterson Companies was able to maintain the payout throughout the crisis without a hiccup and it is still as safe as ever. The 3.3% yield is worth about 50% of the company’s earnings and FCF is sufficient. The balance sheet is strong as well with no red flags popping up. There is some debt on the books but leverage is acceptably low and coverage of 10X is good. While we aren’t totaling discounting a dividend increase we aren’t expecting one. What we are expecting is for the payment to continue uninterrupted. 

The Technical Outlook:  Patterson Companies is Still Range-Bound 

Shares of Patterson Companies popped on the Q2 earnings news and gapped up at the open. The bad news is that profit-takers and short-sellers were waiting to pounce and have sent shares down to the lowest levels in over a month. The good news is that price action remains range-bound and will likely stay that way for the foreseeable future. In our view, a move down to the low end of the range between $28 and $30 would place the stock in an attractive position for both capital gains and dividends.