Patterson Companies Pullback Creates Opportunity: Piper Jaffray

• Shares of Patterson Companies, Inc. PDCO have decline more than 8 percent in the last five days, falling over 6 percent on August 27.
• Piper Jaffray’s Kevin K. Ellich has upgraded the rating on Patterson Companies from Neutral to Overweight, while raising the price target from $48 to $54.
• Ellich believes that the recent pullback in the stock offers a compelling buying opportunity.

According to the Piper Jaffray report the acquisition of Animal Health International is likely to drive upside to the Street forecasts, while the weak dental equipment growth is expected to reverse over the coming quarters.

“We believe the company's strategic realignment of its business segments will enable management to focus its time and energy on performance and driving shareholder value through disciplined capital allocation,” the report stated.

In addition, with the delevering expected on completion of the divestiture of the Medical business in FQ2, Ellich expects the company to allocate more capital for share buybacks, along with potentially undertaking expansion in the international dental market.

Following the announcement of the FQ1 results on August 27, Patterson Companies’ share price decline 6 percent. “FQ1 had a number of moving parts as the Medical business was moved to discontinued operations and Animal Health International drove strong animal health revenue despite some minor issues in the U.K,” Ellich explained.

Ellich expressed optimism regarding the Animal Health International acquisition driving better than expected performance due to robust livestock growth and cattle herd recovery. In addition, with seasonality, easier comps in the latter part of 2015 and the CEREC 30 event by Sirona Dental Systems, Inc. SIRO scheduled for mid-September, dental equipment sales are likely to recover.

The EPS estimate for CY16 has been raised from $2.58 to $2.72.