Key Takeaways:
· Quarter results were in-line with expectations
· Simparica Trio launch on track, to contribute $150M to sales in 2020
· Development of the labs/diagnostics portfolio should provide more growth in years to come, although the company spending money behind it now
Share price: $143 Target Price: $156
Position size: 1.54% TTM return: +62%
This morning Zoetis released its 4Q19 earnings results that were in line with expectations, with sales growth of +7% (+9% organic) and EPS growth of +13% (mostly helped by lower taxes as expenses were higher). For the whole year, ZTS grew top line 10% (including 2% from the Abaxis acquisition) which is well above the 3-4% rate of the animal health market. Lately, ZTS added to its Labs/Diagnostics portfolio with another acquisition, a sign the management team is accelerating its strategy to be a top 3 competitor in the space that is showing a 10% growth per year. To support its growth plans, the company is spending more on direct-to-consumer advertising and increasing its sales force globally. Regarding the Coronavirus, the company sources some ingredients from China and possible ports closures could have an impact if it remains so for an extended period of time, however ZTS has adequate supply for multiple months. Another impact could be less pet owners travelling to the vet and/or less meat consumptions as the economy slows down, but it is too early to tell. One of the big drivers of 2020 is the expected launch of the Simparica Trio, which is expected to be 6-8 weeks after the regulatory approvals. We maintain a positive view of ZTS and see the thesis as intact.
Segment details:
Livestock: flat growth as the US saw a -3% decline while international grew 2%
Companion animal: +18%, thanks to 23% growth international and 15% in the US
2020 guidance:
Animal health market growth of 4-5% (higher than in 2019)
Revenue between $6.650 billion to $6.800 billion (+7 to +9.5% ex-FX)
Adjusted diluted EPS between $3.90 to $4.00 (+8 to +11%)
Zoetis investment thesis:
· Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented
· ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs
· ZTS is growing above the industry rate and has proven resilient throughout economic cycle
· Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013
· Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability
$ZTS.US
[category earnings] [tag ZTS]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109