Share price: $123 Target Price: $156
Position size: 1.52% TTM return: +27%
Key Takeaways:
This morning Zoetis released its 3Q19 earnings results, with sales growth of +7% (+9% ex-FX) and EPS growth of +13%. The companion animal segment contributed nicely to performance with +23% operational sales growth thanks to its diverse portfolio of drugs and products: parasiticide, dermatology and diagnostic tools all contributed. The livestock segment declined 4% due to weakness of the US cattle market (trade uncertainty and weather), and the ongoing African Swine Fever, but poultry helped offset some of the loss. While the swine disease has been a small drag to ZTS business, the management team believes China will recover and move towards industrial production rather than returning to the mom & pop backyard swine production, which ultimately would be a good thing for ZTS. The current CEO is retiring at the end of the year, and the newly appointed CEO is Kristin Peck, who was previously VP of Operations. She was asked on the call how she saw the future strategy of the group. She highlighted the possibilities in the diagnostics/labs sector (Zoetis recently acquired Abaxis). This market has been growing over 10% y/y and there are two main players (Idexx and VCA) and Zoetis could become the third, thanks to organic and inorganic growth in the next 2 years. Near term, the launch of Simparica Trio in Europe and Canada is scheduled for 1Q20, and will be a good indicator of sales potential in the US once it is approved for sale, sometime towards the end of 1Q20. Based on those assumptions, the management team currently targets a $150M in sales in 2020.
The company increased its full year guidance, now targeted to be:
· Operational revenue growth of 9-10% (6-7% organic)
· Adjusted operational net income growth of 11-14%
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
[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