Zoetis Downgraded As Valuation Approaches Morgan Stanley's Price Target

Zoetis Inc ZTS rose 56 percent over the past 12 months to come within striking distance of Morgan Stanley’s price target, closing the upside gap and and triggering a downgrade from the sell-side firm. 

The Rating

Analyst David Risinger downgraded Zoetis to Equal Weight and maintained an $87 price target.

The Thesis

Risinger’s bull case valuation of $105 accounts for stronger-than-expected growth and merger pursuits, while a $70 bear case accounts for demand weakness and decelerated growth.

“We see the potential for modest upward pressure on 2018 numbers given strong momentum but moderating growth over time,” Risinger said in a Monday note. 

Anticipating high FX, efficiencies-driven margin expansion and a boost from tax reform, Risinger forecast 2018 revenue and earnings per share marginally higher than consensus and guidance at $5.75 billion and $3.07, respectively. The figures are seen to reflect respective two-year compound annual growth rates of 6 percent and 12 percent.

During this time, Zoetis’ balance sheet could permit acquisitions, but these will likely be constrained to smaller deals in light of the firm’s 20-percent global market share and potential antitrust concerns for larger transactions.

Price Action

Zoetis shares were trading down 0.7 percent at $84.02 Monday morning. 

Related Links:

Analyst: Zoetis Deserves To Trade At A Premium

Pharma M&A Picks Up Momentum