Patterson Companies Inc. (PDCO, Financial) is a multinational corporation that provides products, technologies, services and solutions for the dental and animal health markets.
Founded in 1878 as Patterson Dental, a dental equipment and supplies distributor, the company has expanded its business over the years by acquiring other dental and veterinary companies such as JA Webster, Animal Health International and DCC Healthcare. Today, the company operates in the U.S., the U.K. and Canada.
Patterson reported strong financial results for the fourth quarter of fiscal 2023 on June 21 and issued promising guidance for the upcoming fiscal year, sending its shares higher. Even on the back of a nearly 12% gain this year, Patterson Companies still looks cheaply valued at a forward price-earnings ratio of 12 considering the stable growth expected in the next five years and the attractive dividend yield of over 3%.
Dental supply market drives strong growth
The company's financial performance was impressive in the most recent quarter with adjusted earnings of 84 cents per share, representing an 18% increase over the previous year. Patterson's net sales increased 5% year over year to $1.7 billion, with internal sales growing 5.7%, driven by increased sales of dental equipment, consumables and value-added services. One notable highlight is the adjusted operating margin expansion the company achieved across all business segments.
The dental segment continued to be one of the fastest-growing segments with Patterson occupying a prominent position within the dental supply market. The company is one of the two largest distributors in North America. The North American dental supply market is projected to continue its growth trajectory, driven by an aging population, advancements in dentistry and the rising need for general, preventive and specialized treatments. The industry is also witnessing a surge in the adoption of new technologies that enhance productivity for dental professionals.
With approximately 202,000 dentists practicing in the U.S. and 21,000 dentists in Canada, it is evident the target market for Patterson is massive. It serves over 100,000 dental practices, laboratories, educational institutions and community health centers. The Dental segment's financial performance reflects its strong market position, with quarterly net sales amounting to $683.5 million and internal sales increasing by 8% year over year. Internal sales of consumables increased 0.3% year over year, while equipment sales increased 19.2% and internal sales of value-added services grew 13.4%.
The Animal Health division reported strong net sales of $1.03 billion, with internal sales showing notable growth of 3.2%. This growth was primarily driven by the companion animal business, which witnessed increased sales across consumables, equipment and value-added services. It operates in two key markets: production animal supply and companion animal supply. The production animal supply business focuses on supplying products to livestock such as cattle, swine, poultry, sheep and goats. The customer base in this segment includes large animal veterinarians, beef and dairy producers, poultry and swine producers as well as retail customers. On the other hand, the companion animal supply segment caters to the needs of pet owners and serves small animal and equine veterinary clinics, including various types of practices. The market size of these two segments is substantial, with a significant number of veterinarians in private practice in the U.S., Canada and the U.K.
The global animal health supply market is experiencing steady growth, and this trend is expected to continue. According to Grand View Research, the industry will grow at a compounded annual rate of 8.8% through 2030. Patterson Animal Health is well-positioned to benefit from this growth by offering a comprehensive range of products, including biologicals, pharmaceuticals, parasiticides, supplies (including private label brands) and equipment. The company also provides various technologies, software, services and solutions.
The companion animal health market is expected to increase at a CAGR of 8.89% through 2028. Within this market, the demand for veterinary services is expected to increase, driven by rising pet adoption rates, higher expenditures on animal health and preventative care, an aging pet population, advancements in products and diagnostic testing as well as extensive marketing programs sponsored by animal nutrition and pharmaceutical companies. These factors indicate a positive outlook for the companion animal supply segment and provide opportunities for Patterson to further expand its offerings and support services.
Patterson Companies continues to demonstrate a strong market position and notable progress across both segments. The company's financial performance in fiscal 2023 showcased its robust standing, with cash generated from operating activities and successful collection of deferred purchase price receivables resulting in a substantial cash inflow of $244.1 million.
In addition, the company declared dividends of 26 cents per share in the fourth quarter and executed buybacks of approximately 1.5 million shares. With $410 million remaining in its share repurchase authorization as of the end of its fiscal year, the company remains committed to enhancing shareholder value through regular, consistent distributions.
Competitive advantages
Patterson Companies operates in a highly competitive distribution industry, facing competition from national, regional and local distributors.
In the dental supply market, Patterson competes against major players like Henry Schein Inc. (HSIC, Financial), Benco Dental Supply Co. and Burkhart Dental Supply. In the animal health supply market, the primary competitors are AmerisourceBergen (ABC, Financial), MWI Animal Health and Covetrus Inc. (CVET, Financial), along with regional and local distributors and manufacturers selling directly to end users. Online retailers like Amazon.com Inc. (AMZN, Financial) and Chewy Inc. (CHWY, Financial) also pose a threat by becoming licensed veterinary mail-order pharmacies.
Despite the increasing competition, Patterson Companies continues to make progress, aided by several competitive strengths. Its broad product and service offerings, including proprietary branded products, competitive pricing and value-added services, have generated customer loyalty. The company focuses on customer relationships, exceptional customer service, cost-effective purchasing and efficient distribution. These characteristics have helped it increase customer stickiness.
To achieve its objective of expanding as a leading value-added distributor, Patterson emphasizes its differentiated, full-service capabilities and utilizes technology to enhance customer service. It provides easy order placement through online platforms and utilizes the Patterson Technology Center to offer expertise in practice management software and advanced equipment solutions. Operating efficiencies are continually improved through investment in management information systems, consolidation of fulfillment centers and sales branches and shared sales branch offices.
Patterson Companies also aims for growth through internal expansion and acquisitions. It completed the acquisition of Dairy Tech Inc. in December, allowing the company to expand its presence in the animal health sector.
Takeaway
Patterson Companies has established itself as a leader in both the dental supply and animal health supply markets. Its strong financial performance, coupled with its comprehensive product portfolio and value-added services, has positioned it for continued growth and value creation.
With a positive outlook for the future and a commitment to enhancing operational efficiencies, Patterson Companies is well-equipped to meet the evolving demands of dental practitioners and animal health professionals, ensuring continued success for the long term.
