Evercore ISI Downgrades Patterson Companies (PDCO) to Hold

Evercore ISI downgraded Patterson Companies (NASDAQ: PDCO) from Buy to Hold with a price target of $48.50 (from $49.50).

The firm lowered FY17 EPS from $2.78 to $2.65 due to a materially more conservative view of core revenue growth (now LSD), margin decline vs. expansion, and a lower benefit from repurchases; FY18 EPS from $3.08 to $2.80 given a continued view of LSD underlying Dental / Vet growth and more modest incremental OMs (more comparable to historical rates); FY19 EPS Initiated at $3.00 which contemplates ~3.5% organic revenue growth, 10 bps of OMx, a 33.5% effective tax rate, and all FCF deployed on share repurchases

Analyst Ross Muken commented, "We are downgrading shares of PDCO following FY4Q’16 earnings where the market rewarded shares for a modest EPS beat and generally in-line initial FY17 EPS guidance. Post today’s move, shares have outperformed the S&P500 on a YTD basis by ~500 bps and the XLV by >900 bps. Given this move, we now see the risk/reward profile of the company as more balanced and are stepping to the side (the initial premise of our upgrade was predicated on our bias for exposure to the dental complex given general healthcare uncertainty and our preference for PDCO over HSIC given relative valuation – while HSIC remains at a notable premium, PDCO now trades richly vs. much of the service companies under our coverage). Furthermore, our view of the company now incorporates a more moderate view of organic sales growth in Dental equipment (20 bps of growth in FY16 was the highest since FY13) and Animal Health consumables (impacted by production animal weakness). Thus, going forward, we see organic Dental growth moderating to ~2% (low end of PDCO’s estimate for market growth) and organic Animal Health accelerating only slightly to 4% (implies LSD all-in core revenue trajectory). When coupled with a modest operating margin expansion path as OM improvements in Dental are swamped by negative mix shift from Animal Health (as telegraphed by management), the ultimate result is a slightly-below-average TSR (MSD to HSD EPS growth +2% yield) especially given modest valuation premium to the market. Lastly, the longer term CEREC contract renewal risk from the XRAY/SIRO merger remains an overhang (could SIRO equipment share ultimately be split with HSIC?). Given these factors we are stepping to the sidelines (rating now Hold) with a new price target of $48.50."

For an analyst ratings summary and ratings history on Patterson Companies click here. For more ratings news on Patterson Companies click here.

Shares of Patterson Companies closed at $48.19 yesterday.

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