Zoetis (ZTS) is the largest 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, explains Jasper Hellweg, analyst with Argus Research.
The company benefits from broad diversification across product categories and customers. It has a wide range of products, including anti-infectives, vaccines, medicated feed additives and other pharmaceuticals for cattle, swine, poultry, sheep, fish and companion animals.
This diversification enables Zoetis to offset weak sales in one segment with stronger sales in others. Furthermore, roughly half of the company’s revenues are generated internationally.
Zoetis has also benefited from acquisitions, particularly its July 2018 purchase of veterinary point-of-care diagnostic company, Abaxis, which operates in a market that has grown at a compound annual rate of 10% over the last three years, as well as more recently its acquisition of Platinum Performance, a nutrition-focused animal health business, in August 2019.
Our forecasts assume that growth will continue through at least the end of the decade, benefiting from recent regulatory approvals, restructuring actions, an increased presence in the fast-growing veterinary diagnostic market, and higher U.S. consumption of poultry.
We expect sales growth in 2019 to be driven primarily by companion animal products, led by Apoquel, as well as by Cytopoint and Simparica, and by the addition of acquired products.
We also note that Zoetis benefits from a relatively short R&D and launch cycle for animal products, which can be tested more quickly than human drugs.
On a fundamental basis, ZTS is currently trading at 35.5-times our 2019 earnings estimate, above its historical average of 27.2 but below its peer average of 42.9. Given that Zoetis is by far the largest publicly traded pure-play animal health company, peer comparisons may not provide the best estimate of intrinsic value.
However, we believe that a premium multiple is warranted based on the company’s strong growth prospects and well-positioned products. Our revised target price of $140 assumes a return, including the dividend, of 11% from the current price.
