For Zoetis, It's All About Margins And M&A

• The share price of Zoetis Inc ZTS has declined 15.3 percent in the last three months.
• Piper Jaffray’s Kevin K. Ellich has reiterated an Overweight rating and price target of $55 on the company.
• Ellich believes that Zoetis offers a “good, defensive stock” that has little to no exposure to the forthcoming election cycle, and that the recent selloff offers an attractive buying opportunity.

Analyst Kevin Ellich believes that Zoetis’ “long-term margin expansion story continues to unfold and the operational efficiency initiative, new product launches, and the company's capital allocation strategy could drive upside to Street estimates.”

Ellich expressed optimism regarding Simparica, the company’s new oral flea and tick medication, scheduled to be approved by year end 2015 and launched before the 2016 flea & tick season.

Ellich also believes that Zoetis is among the best companies in Piper Jaffray’s coverage universe, due to its “stable, durable revenue streams driven by growing demand for higher quality proteins.”

According to the Piper Jaffray report, “The company's operational efficiency initiative should drive significant margin expansion over the next few years leading to accelerating earnings growth with upside potential beyond 2017.”

The company’s “strong management team and industry leading R&D” are expected to drive higher cost savings over the next few years, along with acquisitions and share buybacks via capital deployment and new product launches, all of which are expected to drive upside to the stock valuation.