The Patterson Companies, Inc Goes On Sale

It's Time To Buy Some More Of The Patterson Companies 

The Patterson Companies NASDAQ: PDCO emerged as a dual narrative story last fall. The combination of stay-at-home trends, trends within the pet care industry, and the slow resumption of elective medical services like dental care had the company set up for growth. While the growth story has played out nicely, a problem has emerged for the market that has shares trading at a deep discount today. The problem is that although fourth-quarter Revenue grew 20% over the last year and beat the consensus it's basically flat over the last three quarters and shows no signs of picking up. What does this mean for investors today? A high-quality, undervalued, high-yielding stock is trading at an even deeper discount than it was before.

The Patterson Companies Reports Mixed Q4 Results 

The Patterson Companies had a great quarter marred only by the fact earnings missed the mark by a fair margin. The mitigating factor in regard to the bottom line results is that earnings were impacted by several one-time or diminishing events that ultimately set it up for future success. Those impairments include deal amortization, restructuring &  integration expenses, investment loss, and changes to goodwill. Looking beyond that, almost everything else is good. 

The revenue is sequentially flat as mentioned, but that's three-quarters of record-level revenue which is something else that we like. On a segment basis, the dental segment produced the strongest growth at 49.1%. This increase includes a 53.1% improvement in sales of consumables and a 63% increase in equipment and software sales. The animal health segment, which is 60% of net sales, saw its revenue increased 13.8% with the companion animal sub-segment growing 29.6%.

The earnings in the fourth quarter fell short of consensus estimates but the year ended strong. The fourth quarter GAAP EPS of $0.30 missed by $0.15 and the adjusted EPS of $0.38 by  $0.14 But not enough to hurt the full-year results. The company's adjusted earnings for the full year topped $1.90 compared to $1.55 in the previous year for a gain of 23.2%. 

The Patterson Companies: Raises Guidance, Has Strong Dividend 

The Patterson Companies issued updated guidance which is at once both good and bad. While the  $1.90 to $2.05 in adjusted earnings are an improvement from the previous outlook it is also below the consensus estimates. Worse, The guidance assumes only flat to low single-digit year-over-year growth in the face of a strengthening economy. The good news is that this company's guidance should not impact the safety of the dividend. The company doesn't have much history of dividend increases but does have a solid history of stable and steady payouts. At the current level, the stock yields about 3% and pays out about 50% of Its earnings. The balance sheet is also in decent shape so no reason to fear a distribution cut there.

The Technical Outlook: The Patterson Companies Enters A Correction

The Patterson Companies entered an instant correction in the wake of the Q4 release by shedding 10%. The decline has the stock trading at what appears to be a key support level with signs of support already in the price action. The indicators are bearish so we would expect to see some more downside in the near term but we would also be looking for signs of buying and bottoming as well. Longer-term, we see this stock putting in a bottom above the $28.75 level and then moving higher to retest resistance at the $44 to $48 range late in the year.