Key Takeaways:
Share price: $167 Target Price: $182
Position size: 2.08% TTM return: +38%
Overall Zoetis released another quarter beating expectations with high revenue growth (+21%) driven by both companion animal (+35% thanks to parasiticide and dermatology products) and livestock who appears to finally recover after two years of sub-par results (+9%, driven by International growth of +17%). China grew 75% while Brazil growth was +48%. Overall sales of dermatology products were $245M in the quarter, and should exceed $1B in 2021, making this portfolio a blockbuster sub-segment for Zoetis. Its expanding diagnostics sub-segment grew 47%. Zoetis has advanced its connectivity solutions in veterinary practices, and has received positive feedback on its cloud-based VetScan images platform. During its early launch. Its reference lab integration is advancing as well with good potential for global expansion. On the drug innovation front, its osteoarthritis treatment for dog (Librela) launched in Europe and is having good acceptance, while in the USA it is still pending FDA approval for a 2022 tentative launch date. Once fully launched, this product will be margin accretive for Zoetis as it is expected to sell at a premium.
Gross margins were slightly above consensus. The management team raised its 2021 guidance on the top and bottom line, although the raise was less than the quarter beat, as some of the growth is being reinvested into the business.
So while this was a good quarter, the stock is trading down today as investor were expecting a higher raise in earnings guidance. We continue to think Zoetis is well positioned to continue gaining market share and offer new therapies for companion animals that will lift sales over the coming years.
CEO quotes:
o “it has been one year since the launch of our triple combination parasiticide Simparica Trio. It is exceeding expectations and it’s been well received by customers with a 90% plus penetration rate”
o ” We believe the ongoing market shift to e-commerce is another boost for this category, helping to increase compliance and month on therapy and our direct to consumer campaigns for Simparica and Simparica Trio continue showing a solid return on investment in around the world.”
Guidance raised for 2021:
- Revenue growth of +10.5% to +12% from prior +9% to +11% guide, driven by better than expected Q1 and confidence in portfolio diversification and innovation
- Adjusted EPS guidance raised to $4.42-$4.51 from $4.36-$4.46
In case you need it today, image of a little piglet:
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