Market Overview

Patterson Companies: Something Sizeable This Way Comes


Shares of Patterson Companies, Inc. (NASDAQ: 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, Inc. (NASDAQ: 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. (NASDAQ: 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.

Latest Ratings for PDCO

Sep 2019MaintainsNeutral
Aug 2019MaintainsUnderweight
Jun 2019MaintainsUnderweight

View More Analyst Ratings for PDCO
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Posted-In: Analyst Color Earnings News Guidance Price Target Contracts Reiteration Analyst Ratings


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