Zoetis: Growth To Normalize After Q2; Overvalued At 48x P/E (Preview)

Company Update (ZTS US) (Neutral)

Summary

• Zoetis reported strong Q2 results last Thursday, with revenues rebounding 22% operationally from a weak, COVID-hit prior year.

• Full year outlook for a 12.5-13.5% revenue growth implies H2 growth of just 6%, part of a normalization to lower levels that we expect.

• Management comments are consistent, with a continuation of the historical 5-6% market growth; we believe Zoetis can grow Net Income at 10%.

• Shares are at more than 52x 2020 EPS and 48x 2021 EPS (taking high end of guidance), much higher than the 38.5x we believe is fair.

• With shares at $201.88, we expect a total return of 17% (4.9% annualized) by 2024 year-end, not attractive enough. Avoid.

Introduction

We review Zoetis Incorporated's Q2 2021 results released last Thursday (August 5) to assess if ZTS shares are attractive.

We downgraded our rating on Zoetis from Buy to Neutral in July, after a gain of 31% in 4 months. Since our downgrade, Zoetis stock has gained 2%. (In addition, Zoetis was also Buy-rated in our coverage betwe…