Can Patterson Grow Post Divestiture of its Medical Unit?

Zacks

Patterson Companies, Inc. PDCO completed the divesture of Patterson Medical to Madison Dearborn Partners (MDP) for $715 million. Following the sale of its medical segment, Patterson will now operate through two segments – Dental and Animal Health.

Per management, proceeds from this transaction will be used to pay off debts incurred to fund the purchase of Animal Health. In June, the company acquired Animal Health International.

Why the Divestiture?

Patterson’s medical unit has been comparatively underdeveloped than the other two divisions. Management decided to sell the division since it is not part of the company’s long-term growth strategy. In addition, the divestment will now help the company to focus better on the other two segments.

Other Two Segments to Play Prominent Role

Patterson Animal Health

In June, Patterson completed the acquisition of Animal Health for approximately $1.1 billion in cash. The buyout strengthened Patterson’s foothold in the animal health space, complementing its existing presence in the companion pet market. The company is upbeat about the improving market conditions and rise in pet ownership. Additionally, there is a notable acceleration in worldwide demand for animal protein, which is a positive.

In the first quarter of fiscal 2016, revenues across Patterson Animal Health (49% of total sales) surged 44.3% on a year-over-year basis to $557.3 million on a 45.1% increase in consumable and printed products sales, 28.9% growth in sales of equipment and software, and 22.6% hike in sales of other services and products. Notably, Animal Health contributed $171.9 million. We note that the existing relationship with Abaxis ABAX should help Patterson gain greater market traction in the coming days.

Patterson Dental

Patterson is expected to gain from the gradual recovery in the dental market and the rebounding dental equipment business, assisted by increased technology marketing/promotional activities. The agreement with Sirona Dental SIRO provides a long-term material upside. Patterson is also projected to gain from the partnership with A-dec – a dental office furniture and equipment manufacturer.

In the recently reported quarter, revenue across Patterson Dental (50% of total sales) increased 5.9% to $575.1 million primarily on the back of a 10.1% improvement in consumable and printed product sales. Meanwhile, sales from dental equipment and software fell 3.4%. It is to be noted that about two-thirds of the company’s equipment sales typically take place in the back end of the fiscal year.

Zacks Rank and Stock to Consider

Currently, Patterson has a Zacks Rank #3 (Hold). A better-ranked stock in the medical sector is Masimo MASI, which sports a Zacks Rank #1 (Strong Buy).

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