Patterson Companies: Something Sizeable This Way Comes

Shares of Patterson Companies, Inc. PDCO plunged more than 23 percent to a new 52-week low of $36.46 as the company didn't announce an expected distribution deal with e-commerce giant Amazon.com, Inc. AMZN. Sentiment was also dented by the company’s lower-than-expected quarterly results and weak guidance.

Baird’s Jeff Johnson said ahead of earnings that he's now convinced a distribution agreement with Amazon is increasingly likely. Though the company didn’t announce the deal in its earnings print, the potential deal sounds imminent.

“[I]f PDCO cedes distribution capabilities to AMZN for at least some large customers, PDCO's distribution costs (pick/pack/ship costs) could fall from ~7-8% of revenue to something closer to 5-6% of revenue,” Johnson wrote in a note.

But, the analyst isn't very comfortable with the deal. The deal would cut Patterson’s distribution costs and additional wiggle room to pursue DSO deals, but Johnson said the deal would be a stark admission that the others are good at the company’s core business and would weigh on other firms such as Henry Schein, Inc. HSIC.

The potential deal would also highlight the extent of pricing pressure of larger accounts on distributors and a tacit approval by Patterson of Amazon's presence in the space.

“That makes it hard for distributors to threaten/coerce manufacturers not to consider similar partnerships with AMZN over time, a move that over the long run would potentially put all other distributors (including PDCO and HSIC) in a more precarious position,” Johnson highlighted.

Patterson reported second quarter EPS/revenue of $0.56/$1.42 billion.

The company now expects full-year non-GAAP earnings in the range of $2.25 to $2.35 per share, below consensus estimate of $2.64.

Johnson reaffirmed his Neutral rating on the stock as he is concerned that farmers may limit spending on healthcare products given volatile beef and dairy end-market prices. Further, the analyst prefers to be on the sidelines given Patterson’s mixed margin outlook and loss of Sirona exclusivity.

Shares of Patterson plummeted 16 percent to $39.48; The analyst has a price target of $48.