Patterson Companies (PDCO) distributes products and services to the animal health and dental industries; it has been in business for more than 140 years, and it has animal health and dental locations throughout the U.S. and Canada, notes Hilary Kramer, editor of Value Authority.

Over 50,000 customers, primarily animal companion veterinarians and equine veterinarians, rely on Patterson Companies’ products in order to deliver high-quality animal care.

Patterson Dental is the second-largest distributor of dental products in the U.S. This business segment sells to over 100,000 customers, and it derives 57% of its revenues from the sale of consumable products, including infection control products, restorative materials and instruments.

Patterson has been in a long-term recovery after a weak April 2018 fiscal year, when results were hurt by several factors: 1) the failed execution on a salesforce realignment, 2) the slow adoption of a product transition in dentistry, and 3) added costs related to an Enterprise Resource Planning (ERP) software implementation.

However, after only earning $1.68 a share in 2018, EPS improved to $2.27 in the April 2022 fiscal year, with an extra week in the fiscal year adding $0.04 a share to results. Strength in consumable products in Animal Health and CAD/CAM products in dentistry helped EPS improve from $1.91 in fiscal 2021.

Six months into the current fiscal year, PDCO projects flat to slightly higher EPS for fiscal 2023, expecting EPS in a range of $2.25 to $2.35 a share. So far this year, sales and profitability are slightly lower due to the strength of the dollar and the absence of an extra week. However, the dollar should be less of a headwind in the second half of the year, operating margins are firm, and management believes demand remains good. These factors should allow for improvement in the second half of the year and allow the company to meet their projections for the year.

I believe Patterson is a good choice at the current time where there is uncertainty about the economy and earnings. While there are execution and margin risks at distributors, demand for the company’s products should remain stable. The company has enjoyed good earnings growth since fiscal 2018, and at less than 12X a reasonable EPS estimate of $2.40 in the April 2024 fiscal year, valuation is reasonable for a company that should grow EPS at a mid-single-digit growth rate. The 3.7% dividend yield adds to the attraction of the shares. PDCO is a buy below $29.50. My target is $33, which is where the stock traded at in April of last year.

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