Here's Why You Should Retain PDCO Stock in Your Portfolio for Now

Patterson Companies, Inc. PDCO is well poised for growth in the coming quarters, courtesy of its broad product line. The optimism, led by a strong performance of certain business segments during first-quarter fiscal 2024 and a few notable acquisitions, is expected to contribute further. Integration risks and stiff competitive forces persist.

Shares of this Zacks Rank #3 (Hold) company have lost 24.6% in the past year compared with the industry's 6.1% decline. The S&P 500 Index has increased 5.9% during the same time frame.

The renowned global dental and animal health company has a market capitalization of $1.82 billion. It projects 5.9% growth for the next five years and expects to maintain its strong performance going forward. Patterson Companies' earnings missed the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average negative surprise of 10.78%.

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Let's delve deeper.

Upsides

Broad Product Spectrum: We are optimistic about Patterson Companies' wide range of consumable supplies, equipment and software, and value-added services. A notable offering from PDCO is a private-label brand named Pivotal. It continues to add stock-keeping units to its broader private-label portfolio. The company's NaVetor is an integrated cloud-based veterinary practice management software for its Animal Health segment.

In June, PDCO launched new integrations for DentalXChange to provide additional electronic insurance processing and electronic patient statement solutions. In May, it announced a new product, Patterson CarePay+, to provide dental offices with software solutions for patient financing, dental insurance plans and payment processing.

Acquisitions & Alliance: We are upbeat about PDCO's strategy of expanding its business via strategic acquisitions. In July, Patterson Dental Canada collaborated with Pearl to expand its Second Opinion AI disease detection capabilities' reach in the Canadian dental market. By integrating Second Opinion within Patterson Dental Canada's leading software platforms, such as Eaglesoft, Fuse and Dolphin, the partnership aims to elevate the standard of dental care across North America.

During 2023, Patterson Companies completed its acquisition of the Texas-based companies, Veterinary Practitioners and Animal Care Technologies, which provide innovative solutions to veterinary practices through data extraction and conversion, staffing and video-based training services. In 2022, the company announced the acquisition of substantially all the assets of Dairy Tech, Inc., which provides pasteurizing equipment and single-use bags.

Fulfillment Facility Modernization to Optimize Supply: PDCO started strategic modernization of its existing fulfillment facilities and capabilities. It is adding new technologies, such as robots, to automate order picking and enhance the fulfillment pace.

PDCO is also focusing on expanding its fulfillment capacity by opening next-generation centers across several countries that will help build sustainable and more efficient channel capabilities. The company's strategic investments in fulfillment centers should help alleviate capacity constraints, boost distribution capabilities and enhance growth.

To support its facility modernization and expansion, PDCO has allocated $51.2 million in capital spending during fiscal 2024. The amount has increased 20.8% from the prior-year level.

Strong Q1 Results: Patterson Companies' revenues and earnings missed estimates in the first quarter of fiscal 2024, reflecting the negative impact of a cybersecurity attack on its claims processing vendor, Change Healthcare. The impact is likely to alleviate in the upcoming quarters, potentially improving the top and bottom-line performance. Continued growth in the production animal business supported sales in the Animal Health segment.

PDCO has been making significant investments in developing its software and value-added services offerings across both its Dental and Animal Health segments. These are likely to drive the demand for its products.

Downsides

Stiff Competition: The U.S. dental products distribution industry is highly competitive and consists chiefly of national, regional and local full-service and mail-order distributors. Patterson Companies needs to continue to introduce newer products in the market to withstand competitive pressure. Failure to do so can dilute its market share.

Integration Risks: PDCO has been on an acquisition spree, which is improving its revenue opportunities but aggravating integration risks. Regular acquisitions are also a distraction for management and are likely to impact organic growth. This may limit the company's future expansion initiatives and worsen its risk profile.

Estimate Trend

The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $6.62 billion, indicating a 0.8% increase from the previous year's level. The consensus mark for adjusted earnings per share is pinned at $2.33, implying a 1.3% year-over-year improvement.

Stocks to Consider

Some better-ranked stocks in the broader medical space are DaVita Inc. DVA, Quest Diagnostics Incorporated DGX and Boston Scientific Corporation.

DaVita, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term growth rate of 17.5%. DVA's earnings surpassed estimates in each of the trailing four quarters, the average surprise being 24.2%.

DaVita's shares have risen 56.9% compared with the industry's 27.5% growth in the past year.

Quest Diagnostics, carrying a Zacks Rank of 2 at present, has an estimated long-term growth rate of 6.2%. DGX's earnings surpassed estimates in each of the trailing four quarters, the average surprise being 3.3%.

Quest Diagnostics' shares have risen 21.6% compared with the industry's 27.5% growth in the past year.

Boston Scientific, carrying a Zacks Rank of 2 at present, has an estimated long-term growth rate of 12.6%. BSX's earnings surpassed estimates in each of the trailing four quarters, the average surprise being 7.2%.

Boston Scientific's shares have rallied 50.8% compared with the industry's 17.2% growth in the past year.

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