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Zoetis Growth Trends Improving

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By on BioPharma

Zoetis reported first-quarter non-GAAP EPS on Tuesday, that exceeded our expectations by $0.02 and consensus by $0.01. Commentary suggested there has been some stabilization of trends in the U.S. cattle market and that the recently launched Apoquel is exceeding expectations—to the extent that there are now manufacturing shortages that could persist until early 2015.

Challenges in the swine market and new competitive products within the companion market will likely offset these improvements, however. On the margin side, we believe foreign exchange will be a benefit, but we expect margin to be down from first-quarter levels for the balance of the year as the company builds out manufacturing capabilities as part of the continuing stand-up process.

As a result, we are maintaining our full year 2014 EPS estimate of $1.51 (up 7%) and our 2015 estimate of $1.66 (up 10%) despite the outperformance in the quarter. We maintain our Outperform rating on Zoetis and believe that the company is positioned to realize improving growth rates as we move into 2015, driven by both an improving environment and the substantial completion of the company’s stand-up activities.

We now project 2014 revenue of $4.68 billion, which is up 2.7% but down slightly from $4.72 billion previously. Operating margin is now expected to be 25.1% for the full year, up from 24.8%, previously, because of the better performance in the quarter. We expect margin to be down sequentially from first-quarter levels due in part to foreign exchange benefits that we do not expect to recur and higher costs associated with building out the global manufacturing and supply organization. On the bottom line, we maintain our EPS estimate of $1.51 (up 7%). In 2015, we now project revenue of $4.93 billion (up 5.3%), down slightly from $4.97 billion. We now expect operating margin of 25.5% (up 40 basis points from 2014 and up 10 basis points from our previous estimate). Our EPS estimate of $1.66 (up 10%) is unchanged.

As of Tuesday’s close, Zoetis is trading at 18.6 times our calendar 2015 EPS estimate of $1.66, which compares with Virbac at 20.5 times, Dechra at 19.4 times, veterinary diagnostics companies at 31.2 times, and large pharma peers at 15.3 times. We believe recent acquisition activity in the veterinary market implies valuation for Zoetis has room to expand as well—particularly if the new product flow improves. Given this attractive valuation relative to its peers and good prospects for growth in 2015 and beyond, we reiterate our Outperform rating. 

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