Key Takeaways:
Share price: $213 Target Price: $227 NEW ($213 prior)
Position size: 2.30% TTM return: +21%
Zoetis once again beat expectations and generated sales and earnings growth of 10% in the quarter. The International segment came in higher at +14% while the US were +7%. Livestock declined 2% due to generic competition and a tough y/y comparison, but was in positive territory internationally (favorable export conditions for meat producers). Companion Animal continued its solid trajectory with +19% sales growth led by Simparica Trio uptake and key dermatology products reaching $300M in sales, a historical high. Pain medication (Librela/Solensia) is above expectations in its first full quarter launch in Europe. The company continues to innovate to differentiate itself from generics & competitors. For example, it launched a chewable version of Apoquel (to treat dog allergy/itching). Looking forward to 2022, we expect pet health to continue its growth trajectory, as pet ownership has seen such a boost during Covid and increased pet owners awareness of their companion’s health in general, thanks to WFH. The mix was favorable to margins, with gross margins going back to historical high.
Valuation remains at a premium but is justified by innovation, market share gains (growing above industry levels) and consistent execution.
Guidance raised for 2021 again:
- Revenue growth of +14-14.5% from +12.5% to 13.5% previously to reflect good 3Q
- Adjusted net income range increased to $2.2B-$2.25B with operational growth of 16.5-18% from 13% to 15% previously
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