Zoetis: Earnings Growth Set to Reaccelerate, But Shares Down 14% Year-to-Date
Company Update (ZTS US) (Buy): Zoetis is the leader in the growing Animal Health market, but earnings struggled with some one-offs in 2023.
Highlights
Shares have fallen 14% year-to-date to their lowest since November.
Animal Health has good structural growth; Zoetis grows faster than market.
Recent earnings and cashflow were held back by temporary factors.
EPS growth should reaccelerate to high-single-digits to low-double-digits.
At $168.90, we see 28% total return (9.4% p.a.) by 2026 year-end. Buy.
Introduction
We revisit Zoetis after its shares fell to their lowest level in 2024 this week, now down 14.1% year-to-date and back to their lowest level since November 2023:
Zoetis Share Price (Last 1 Year)
Source: Google Finance (23-Mar-24).
We held Zoetis in our portfolios for nearly a decade during 2014-23, generating strong gains, including a 462% return on personal capital. In our published research we first wrote about Zoetis with a Buy rating in June 2019 and made two successful round-trips, upgrading it back to Buy in February 2022. We last wrote about Zoetis in February 2023.
We believe Zoetis’s EPS growth is set to reaccelerate to high-single-digits to low-double-digits in the next few years. The Animal Health market has structural growth driven by both a rising number of pets and better medical care for each pet. Zoetis’s Adjusted EBIT growth was in double-digits before COVID; while it had decelerated to ~4.5% in dollars in both 2022 and 2023, this was the result of one-offs including post-COVID effects, a step-up in R&D and distribution costs, the downturn in China, margin-dilutive Librela growth, and currency. Management medium-term targets imply EPS growth will be in high-single-digits to low-double-digits in the next few years, and 2024 outlook includes an Adjusted Net Income growth of 9-11% (operationally). While its two biggest products (Simparica Trio and Apoquel) are set to see new competition, the headwind should be modest and offset by growth in the new Librela/Solensia pain franchise.
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