Zoetis: Pets and Profits

09/06/2013 7:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

This is the only publicly-traded pure-play in the animal health and vaccines market. This is a global growth business, making it an attractive long term investment, suggests John Dessauer, editor of John Dessauer's Outlook.

In terms of revenue, Zoetis (ZTS) is the world leader in this market. Until this year, Zoetis was a wholly-owned division of Pfizer.

In January, Pfizer sold 20% of Zoetis to the public through an IPO. In June, Pfizer offered the remaining 80% to Pfizer shareholders through an exchange offer. The offer was substantially over-subscribed. Zoetis is now a fully independent company.

Zoetis offers animal health products for livestock and domestic pets. Sales of livestock related products have grown at an 18.5% rate over the last three years. Pet related products have grown at a 12.5% rate.

Zoetis is financially strong, with $468 million in cash and cash equivalents, and average net profit margins of 10%.

The debt/capital ratio is currently on the high side at 83%, because Zoetis raised $3.65 billion through a bond issue, just before the IPO.

Full-year earnings per share are expected to range from $1.36 to $1.42 on revenues of $4.425-$4.525 billion. The current consensus among analysts is for full-year earnings of $1.40 on revenues of $5.522 billion.

Major research groups, including Argus, see Zoetis' earnings per share growing at an 11% compound rate over the next five years. Both Argus and Deutsche Bank research have a 12-month target price of $38 for Zoetis.

They also agree on a 2014 earnings per share estimate of $1.62. There is a dividend of $0.26 per share per year for a current yield of less than 1%.

Following the conclusion of the Pfizer exchange offer, the stock dipped to a low of $28.97. My rating is to buy Zoetis below $30.

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