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Zoetis EPS Better Than Expected

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By on Technology & Software

On Friday morning Zoetis reported first-quarter non-GAAP EPS of $0.38, which beat our expectations by 2 cents and consensus by 1 cent. Relative to our model, outperformance was driven by better gross margin (2.5 cent EPS benefit) and lower SG&A spending (1 cent EPS benefit), offset by modestly lower revenues and a higher tax rate (both of which produced roughly 1 cent of EPS headwind in the period).

Looking across regions, the United States, Latin America, and Asia all appeared to exceed our growth targets, while Europe was surprisingly weak in both production and companion. Full-year guidance for EPS and revenue was maintained, and so we expect to maintain our full-year EPS target of $1.51 (up 6%). 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 completion of the company’s post-spin stand-up activities.

Key Points Revenue. Total revenue of $1.097 billion was up 0.6% and roughly 3.6% on a constantdollar basis. This was roughly $30 million below our target and consensus.  Looking across species, livestock and companion were both $10 million-$20 million below our model.  Geographically, the United States exceeded our target slightly, which is surprising considering the weather; both MWI Veterinary (MWIV $164.08; Outperform) and Henry Schein (HSIC $115.18; Outperform) reported Tuesday morning that their U.S. vet businesses were soft in the March quarter.

Europe looked surprisingly weak in the period, declining 4% overall, versus our 4% growth target. Margins better than expectations. The non-GAAP operating margin of 27.8% was 251 basis points above our target, driven by a gross margin that was 161 basis points above our model and SG&A spending that was 70 basis points below. 

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