Key Takeaways:
· COVID-19 had a limited impact on their business in Q1, but impact should be greater in Q2 as US and Europe are in lockdown
· China seeing a rebound, and seeing an improvement in US and Europe clinic visits recently
· Expect Q3 and Q4 to be better, business back to normal
· Guidance for the year reduced to reflect potential impact of a recession
· Share repurchase put on hold temporarily to conserve cash
Share price: $127 Target Price: $156
Position size: 2.16% TTM return: +27%
Zoetis released its Q1 earnings results this morning, with operational sales +7% and EPS +8%. The company lowered guidance to reflect the current environment: pressure on vet traffic from lockdowns and meat-processing plants closures that will likely reduce the size of livestock herds in the near term. The pet business is a bit more resilient though, as the management team is seeing improving trends in vet visits from its 15-20% drop in early April in the US (and more in Europe), thanks to greater use of telemedicine and curbside drop-offs. The Simparica Trio sales totaled $15M in the quarter, with sales expected to be below forecast due to the pandemic: $100-125M instead of $150M. A reminder that Simparica Trio is seen as a big growth driver for the company in 2020-2021.
In April, Zoetis launched its pet insurance service (Pumpkin) that offers an optional monthly preventive care plan (and option to buy their drugs at a discounted rate – smart!). The company is suspending its share repurchase but maintaining its dividend, which should be 22% higher than in 2019. Overall we do not think the COVID-19 crisis is changing the long-term thesis on Zoetis and remain positive on the growth outlook for the company.
Segment details:
· Livestock: the US saw a 5% growth (double digit growth in poultry and swine) while international grew 2% ex-FX
o 15% reduction in protein processing plants in the US
· Companion animal: +12% sales growth in the US (initial stocking of the new Simparica Trio, as well as good sales of dermatology portfolio) and 8% operational growth in international markets (Simparica Trio launch, China performed well despite COVID-19)
2020 guidance lowered to reflect COVID-19, recessionary conditions and FX headwinds:
Revenue lowered to $5.95B-$6.25B from $6.650 billion to $6.800 billion (or a -2% to +3% operational growth)
Adjusted diluted EPS lowered to $3.17-$3.42 from $3.90 to $4.00
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