Key Takeaways:
Share price: $198 Target Price: $227
Position size: 2.22% TTM return: +18%
Zoetis released earnings this morning that were slightly above expectations. Overall sales were up +9%, driven by Companion Animal. This segment continued its solid trajectory with +21% sales growth led by Simparica Trio, key dermatology products and pain medication (Librela/Solensia). Librela is now the #1 pain medication for pets in Europe – a title earned in its first year of launch. Regarding competition in its recent successful launch of Simparico Trio, this is not expected until next year. The recent rise in pet adoption due to the covid pandemic continues to be a tailwind for ZTS. As for dermatology drugs, ZTS estimates 6 million dogs untreated in the US alone, due to lack of awareness by dog owners…any new competitors would help raise understanding of this condition. Livestock declined 6% due to generic competition for Draxxin (similar to last quarter). For this past segment, the management team remains optimistic, targeting a return to mid-single-digit growth in FY23, thanks to international markets exposure. Gross margins helped up well in the face of inflation (69.6% or up 170bps y/y), although SG&A spending came higher and offset some of it. Regarding pricing power, ZTS increased prices by 1% overall in 2021, with the same rate expected in 2022. Pricing is easier to raise in companion animals with leading & innovative brands, while drugs facing generics competition is harder to increase. Overall, ZTS expects price increases to help offset rising inflation.
Guidance for 2022:
- Revenue growth of +9-11% is respectable especially after a +15% growth rate in 2021
- Operating margin to expand modestly as the company plans to invest behind growth drivers
- Adj. EPS guidance of $5.09-$5.19 is below consensus of $5.21, but this looks to be due to higher FX impact
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