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Why Patterson Companies, Inc. Is Plunging Today

By Brian Feroldi – Nov 22, 2016 at 12:23PM

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Shares of the veterinary and dental products wholesaler fell hard in response to the company's less-than-stellar quarterly results.

Image source: Getty Images.

What happened

Shares of Patterson Companies (PDCO -0.60%), a medical equipment wholesaler primarily focused on veterinary and dental products, dropped by more than 20% as of 11:30 a.m. EST on Tuesday after the company reported fiscal second-quarter 2017 results.

So what

Net sales for the period came in at $1.42 billion, which was up just over 2% from the same quarter a year ago. This number was a bit shy of the $1.44 billion in revenue that analysts had projected.

Things didn't look too good on the bottom line, either. On a GAAP basis, the company showed a profit of $0.48 per share, but if adjusted for amortization costs and nonrecurring expenses, then earnings per share would have been $0.56. That was also a bit light of the $0.60 in adjusted profits that Wall Street was expecting.

Management blamed the poor results on "softness in the U.S. dental market and challenges with branded pharmaceutical companies in our animal health business." Executives also stated that revenue was impacted by the company's decision earlier in the year to realign its sales force.

If all of that wasn't bad enough, management also knocked down its profit guidance for fiscal 2017. The company's prior outlook called for non-GAAP adjusted earnings of $2.60 to $2.70 per diluted share, but management is now guiding for $2.25 to $2.35 per diluted share.

Headline numbers aside, Patterson announced that it had elected to not extend its exclusivity agreement with Dentsply Sirona (XRAY 1.04%) for its entire portfolio beyond September 2017. Instead, the company decided to start a new relationship with Heartland Dental, the largest dental support organization in the U.S.

Here's what Scott Anderson, Patterson's CEO, had to say about the move:

This decision is consistent with our strategy of serving the evolving needs of all our customers and will allow us to better serve the full range of practice models in the future. Importantly, it will also potentially enable more product innovation and bring more options to our customers by opening up our superior technology support infrastructure to more manufacturers, who view our expertise and support as a meaningful competitive advantage. We expect this move, along with our sales realignment activities taken earlier in fiscal 2017, to better position Patterson Dental to serve the evolving dental market.

Add it all up and it is easy to understand why traders are selling off Patterson's shares today.

Now what

In response to reporting a difficult quarter, CEO Anderson did his best to remind shareholders that the company remains positioned for long-term growth:

The Dental business is positioned to benefit from favorable demographic trends, including an aging population. In Animal Health, the worldwide demand for protein will intensify; and consumers are increasing both their pet ownership and the dollars they spend on their pets. These are compelling trends.

While those statements are certainly true, it is hard to predict the long-term ramifications of the company's decision to discontinue its exclusivity relationship with Dentsply Sirona. I'd suggest that potential shareholders approach this stock with a wait-and-see mindset.

Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter, where he goes by the handle @Longtermmindset, or connect with him on LinkedIn to see more articles like this.

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