Key Takeaways:
Share price: $203 Target Price: $213 NEW ($182 prior)
Position size: 2.24% TTM return: +29%
Zoetis continues its great performance in Q2, with sales up 22% ex-FX and adjusted net income up 28% ex-FX. Demand in Companion Animal segment remains solid, with strength in Simparica Trio (now at $139M sales in the quarter, only 15 months post-launch – with lower cannibalization of base product than expected!) & parasiticides and dermatology products. CT scan images business is progressing well, and Diagnostics posted 38% growth as access to vet clinics improves. China and Brazil grew 30% and 40% respectively. In the US, the livestock segment had some weakness in cattle and poultry. The company cited some competition and soft-end market as the reason for US decline. Thanks to the mix (companion growth > livestock growth), gross margin beat expectations and came at 71%.
Going forward, catalysts will be:
- increased clinic visits & dollar spent
- broader utilization of diagnostics
- strong execution in international markets
Yesterday the company announced the acquisition of Jurox, an Australian animal drugs manufacturer, and is expected to close in 1H22. Australia is ZTS’ 5th largest market, and this acquisition will bring some drugs with global expansion possibilities. Following 2Q results, ZTS is raising its 2021 full year guidance by ~1% on the top line and $0.05 on the EPS line. Some of the upside seen in 2Q is being reinvested in the business, something typical for ZTS.
CEO quotes:
o “The entire portfolio is benefiting from strong pet care trends in terms of increase in clinic visits rising spend per visit, and a focus on diagnostics and specialty care especially among newer and younger generations of pet owners”
o Livestock: “in the US data suggests the foodservice and restaurant industry has continued to recover in the second quarter, which is a crucial dynamic for demand of our premium products”
o Diagnostics: ” So it’s in relative terms, it’s not the largest proportion of our of our revenue streams certainly, but we are very, very much excited about the potential for the future”; “We are well positioned to grow faster than the diagnostics market, which is expected to grow double-digits”
Guidance raised for 2021:
- Revenue growth of +12.5% to 13.5% from +10.5% to +12% due to better than expected results and confidence in the portfolio’s performance
- Adjusted net income range increased to $2.135B and $2.175B, with operational growth of 13% to 15%
- Adjusted EPS guidance raised to $4.47-$4.55 from $4.42-$4.51
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