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Stock Strategist Industry Reports

Unique Characteristics in Dental and Veterinary Distributor Markets Support Wide Economic Moats

We've upgraded our moat ratings for Henry Schein and Patterson Companies to wide on distribution network cost advantages and high switching costs among their fragmented customers and suppliers.

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We have upgraded  Henry Schein (HSIC) and  Patterson Companies (PDCO) to wide-moat companies thanks to their strong competitive advantages in the dental and veterinary distribution markets. As critical intermediaries between a highly fragmented base of customers and suppliers that depend on their scale and customer services, Schein and Patterson possess competitive advantages that support a long time frame of attractive returns on capital, in our view. We also think the high out-of-pocket dental and vet markets will sustain consistent midsingle-digit growth over the long term. Both stocks are trading close to our fair value estimates of $99 and $39 for Schein and Patterson, respectively, and while valuations don't currently suggest attractive entry points for either firm, we think investors should keep these names on their watch lists.

Schein and Patterson are both major players in the dental, animal health, and medical distribution markets.
For the most part, Schein and Patterson are extremely similar, particularly in their dental and animal health distribution segments. As distributors, these companies are key middlemen between customers and suppliers, guaranteeing timely delivery of consumable products, equipment, and services. Typical products handled by these firms include lab products, pharmaceuticals, vaccines, surgical tools, diagnostic tests, infection control items, vitamins, dentist chairs, and X-ray machines. Customer services include software products, IT networking and support, training and education courses, consulting and brokerage services, and equipment installation, maintenance, and repair. Each company also possesses smaller medical distribution segments. Schein's medical business distributes vaccines, pharmaceuticals, surgical products, and other consumables and equipment to physicians' offices and ambulatory surgery centers. Patterson's medical distribution segment specializes in equipment and suppliers for rehabilitation clinics. Dental, animal health, and medical revenue make up approximately 55%, 27%, and 17% for Schein, and 65%, 21%, and 15% for Patterson, respectively.

Michael Waterhouse does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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