Three analysts have raised their 2018 earnings forecast for this animal health company. Wall Street expects double-digit growth for the next five years.
Zoetis Inc (ZTS)
From Argus Weekly Staff Report
Zoetis Inc. (ZTS) is the only publicly traded pure-play animal health and vaccine company and is the market leader in revenue. We believe that the industry has solid growth potential and that Zoetis will be able to optimize its leadership position. The company also benefits from broad diversification across product categories and customers, with a wide range of products for cattle, swine, poultry, and companion animals. This diversification has enabled Zoetis to offset weak sales in a particular segment with stronger sales in others.
Our forecasts assume that growth picks up in 2017, as issues such as currency losses and inventory-stockpiling are cycled through, and the benefits of restructuring kick in. The company’s margins have benefited from the lack of generic competition in the animal drug space. Its lead product, Apoquel, a dermatitis treatment for dogs, generated $248 million in sales in 2016 and management projects long-term peak sales of more than $300 million.
The new product pipeline is also robust, and includes the recently launched Simparica, a chewable flea-and-tick drug for dogs. We note that Zoetis also benefits from the shorter R&D and launch cycle for animal products, which can be tested more quickly than human drugs.
Zoetis has expressed interest in making additional acquisitions similar to its purchase of Abbott’s Animal Health business and Pharmaq, a fish vaccine company. Zoetis may also be an acquisition target in its own right—perhaps from Bayer, which specializes in veterinary drugs. In June, Valeant Pharmaceuticals approached Zoetis with a buyout offer, but the deal fell through.
Zoetis reported 4Q adjusted earnings of $0.47 per share, $0.02 above consensus and up $0.04 year-over-year. Based on higher-than-expected foreign exchange pressure, we are reducing out 2017 EPS estimate to $2.35 from $2.38. Our 2018 forecast is $2.70.
ZTS is trading at 22.5-times our 2017 earnings estimate, above the average of 18-times for major pharmaceutical companies with significant animal health operations. ZTS shares are trading towards the low end of their historical forward P/E range of 18.5-30.5 times. Given that Zoetis is the only publicly traded pure-play animal health company, peer comparisons may not provide the best estimate of intrinsic value. However, we believe that these above-average multiples are warranted based on the company’s continued strong growth prospects and relative insulation from generic competition. Our rating remains BUY with a target price of $60.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, March 24, 2017