Zoetis: Downgrade To Neutral After Record High, 44x P/E (Preview)

Company Update (ZTS US) (Downgrade to Neutral)

Summary

• We are downgrading our rating on Zoetis from Buy to Neutral on valuation grounds after a 31.0% gain in 4 months.

• A combination of its current valuation and forecasted earnings growth means the stock's annualized return will likely be around just 5%.

• We assume a long-term Net Income growth of 10%, corresponding to revenue growth returning to 6.5%, and a 2024 P/E of 38.5x.

• Zoetis stock is trading at 44x expected 2021 EPS; on 2020 EPS, its P/E has recently exceeded 50x for the first time in the last 5 years.

• With shares at $199.68, we expect an exit price of $233 and a total return of 19% (5.1% annualized) by 2024; Dividend Yield is 0.5%.

Introduction

We are downgrading our rating on Zoetis Inc. from Buy to Neutral on valuation grounds after a 31.0% gain in 4 months. Zoetis stock hit a new all-time high last week and currently trades at approx. 44x expected 2021 EPS.

We upgraded our rating on Zoetis from Neutral to Buy in March this year, after a 14% correction from its previous peak. Pr…