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Here's Why Investors Should Sell Patterson Companies Now

Zacks Equity Research
Updated

Patterson Companies Inc. PDCO has had a dismal run on the bourses of late. Year to date, the company has lost 8.8%, underperforming the broader industry’s gain of 15.3%.

A rapidly changing healthcare environment in the United States, unfavorable price movement, a competitive dental products distribution industry and integration risks pose significant challenges for the company.

Political Qualms: The ongoing political conundrum pertaining to the repealing of Obamacare by the Republicans has given rise to uncertainties in the dental space. Last week, the MedTech space received a heavy blow with Trump’s latest ‘Executive Order,’ where he pulled the plug on Obamacare subsidies that reduce net health care costs for Americans with low income again.

These legislations and regulations are expected to affect expenditures or reimbursements for dental services through private dental insurance plans. We believe this will mar Patterson’s overall results in the quarters to come.

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Dental Segment Lacks Luster: Patterson’s dental segment contributes significantly to total revenue every year (42.7% of net revenues in fiscal 2017). However, decrease in sales of CEREC and other digital technology equipment is likely to mar revenues for dental consumables and dental equipment.

Furthermore, management at Patterson anticipates headwinds in technology equipment business to persist through fiscal 2018 as the company transitions to its new go-to market strategy with an expanded technology product portfolio.

Declining Estimates: The estimate revision trend for Patterson has been unfavorable. For the full and next year, two analysts moved south compared to no movement in the opposite direction over the last two months.

As a result, the Zacks Consensus Estimate for the full year inched down 0.9% to $2.29 per share. The next-year earnings estimates dropped 1.2% to $2.48 per share. The stock has a Zacks Rank #4 (Sell).

Patterson Companies, Inc. Price and Consensus

 

Patterson Companies, Inc. Price and Consensus | Patterson Companies, Inc. Quote

Cutthroat Competition: The U.S. dental products distribution industry is highly competitive and consists principally of national, regional and local full-service and mail-order distributors. Patterson faces competition from another national full-service firm, Henry Schein Dental, a unit of Henry Schein HSIC.

In addition, there are at least 15 full-service distributors that operate on a regional level and hundreds of small local distributors. Patterson needs to continue to introduce products in the market to counter competition. Failure to do so will dent the company’s market share.

Key Picks

A few better-ranked stocks in the broader medical sector are SONOVA HOLDING SONVY and Luminex Corp. LMNX. SONOVA and Luminex sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SONOVA represented a solid return of 14.5% over the last year. The company has a long-term expected earnings growth rate of 7%.

Luminex came up with a positive earnings surprise of 188.9% last quarter. The stock has a long-term expected earnings growth rate of 16.3%.

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Luminex Corporation (LMNX) : Free Stock Analysis Report
 
Henry Schein, Inc. (HSIC) : Free Stock Analysis Report
 
Patterson Companies, Inc. (PDCO) : Free Stock Analysis Report
 
SONOVA HOLDING (SONVY) : Free Stock Analysis Report
 
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Zacks Investment Research