Patterson Companies Leverages Healthcare For Income Investors

Key Points

• Patterson Companies leverages internal sales to drive growth in its 2 businesses. 
• The company outperformed on the top and bottom lines and raised guidance. 
• PDCO stock pays a 3.25% yield and the company buys back shares. 

Patterson Companies, Inc. NASDAQ: PDCO is a dual-story that includes healthcare for humans and animals. The company operates in 2 segments, Dental and Animal Health, and both are growing. The growth is good, but the outperformance relative to expectations, the cash flow, and the capital return outlook are better. Patterson Companies beat on the top and bottom lines, raised its guidance, and it pays a healthy dividend that yields 3.25% after the double-digit jump in share prices. 

While distribution increases are not likely, the company hasn’t made one in 7 or 8 years, but share repurchases are. Patterson bought back 1.5 million shares in Q4, bringing the FY total to $156.8 million in capital returns, including the dividend. That’s worth another 2% in effective yield and solid support for the market.

Capital returns will continue because the company’s cash flow and balance sheet are solid, and there is $410 million left under the current authorization. That’s worth nearly 15% of the market cap, and a driving force in the 13% gain in share prices caused y the Q4 results and 2024 guidance. 

Patterson Company Cleans Up In Q4 

Patterson Company’s business model is internal sales, and it leverages it to full effect. The company produced 4.9% top-line growth, beating the consensus estimate by 360 basis points. The strength was driven by gains in both segments, led by an 8% increase in Dental. Animal Health grew by 3.2%, with both segments showing strong growth in the equipment sub-segments. Equipment sales grew by 19.2% in Dental and 16.7% in Animal Health to track in line with other medical device makers. 

The margin news is also good. The company reported expanded operating margins for both segments. The company-wide operating margin expanded by 170 basis points to 6.1%, driving a solid bottom-line beat. The adjusted $0.84 grew by 18% compared to last year and beat the consensus by 2000 bps.

The company expects the top and bottom line strength to continue in F2024. Guidance for adjusted earnings came in at $2.45 at the low end compared to a $2.34 consensus. This will result in upward earnings estimates and potential upward revisions to the stock price target. The analysts are bullish on the stock, rating it a Moderate Buy, but there are only 4 current ratings; the most recent is stale. The price target assumes fair value near the post-release highs; upward movement may depend on new revisions. The institutions might not be much help either; they’ve been selling on balance for the last few quarters. 

The Technical Outlook: Patterson Companies Melts Up 

The price action in the Patterson Companies gained more than 10% following the Q4 release and may move higher. The caveat is that there is little market to follow through on the move, and resistance may be solid at the new highs. The new highs mark the mid- or near-mid-point of a trading range established following the COVID bubble. If this level holds as strong resistance, it could cap gains for the foreseeable future. In that scenario, investors should expect PDCO stock to move back toward the lower portions of the range. If not, the stock may be able to rally as much as 12.5% before hitting the top of the range. In either scenario, capital returns should continue to flow. 

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