7 Analysts Initiate Coverage on Zoetis; Who to Believe?
The breakdown of the ratings can be split into two sections: Buy and Hold equivalents.
First the Hold sentiments:
Bank of America “unleashed” the company with a Neutral rating and $35 price target. The report set expectations of 15 percent EPS growth in the long term by leveraging “clear competitive advantages.”
Zoetis was also highlighted as benefiting from being in the veterinary space, which shelters it from regulatory and reimbursement challenges that often plague drug companies. Finally, the report stated the company would benefit from strategic acquisitions, but that Pfizer's 80.2 percent stake in the company would act as a valuation overhang.
Goldman Sachs initiated coverage on the company as well, issuing a Neutral rating and $33 price target. The report expects strong macro trends in livestock and companion animals to provide momentum for the company, with EPS growth in the upper teens through 2014.
Goldman's price target remains under market prices, and runs on a 22.5x earnings multiple, citing a lack of visibility into the company as a reason why they were unwilling to go higher with the target.
The final Hold equivalent came from Morgan Stanley, which rated Zoetis with an Equal-Weight rating and no price target.
The Morgan Stanley report was the only Hold equivalent initiation that presented a strong downside, stating that the 30 percent growth since the IPO in February compare to the S&P's 4 percent rally presented limited upside. It went on to say that there is balanced risk and reward from a 24 times EPS estimate, which does not warrant an Overweight rating.
On the bullish side were the four Buy sentiment ratings, here is a rundown of the reasoning presented by them:
Deutsche Bank, often a leader among bank analysts, initiated the company with a Buy rating and $38 price target.
The report focused on Zoetis' domination of the veterinary markets, establishing itself as the number one or two name in every single category available. It also stated that Zoetis was positioned to benefit from the strong demand growth for animal protein, mixed with limited resources which will require increased efficiency in farming. This efficiency can be achieved through healthier and more productive animals, and Zoetis is there to push them in that direction.
Piper Jaffray was also among those initiating on the bullish side, giving Zoetis an Overweight rating and $40 price target.
Predicated on mid-to-high single digit growth that doesn't rely on government reimbursement, a stable and mature industry with strong demand, and the scarcity value that a large cap animal health stock provides, the report defends its aggressive 24.5 times EPS valuation. Piper also outlined that it looks at the company as an animal health industry name, and not a pharmaceutical name as many others do.
J.P. Morgan initiated Zoetis with an Overweight rating and a slightly less aggressive price target of $39.
Its report focused on Zoetis' domination of the animal health industry, its advantages over traditional pharmaceutical plays, and significant margin expansion growth potential coming from its direct sales infrastructure and industry leading R&D. At the end of the report, it stated that it expects growth of 800 basis points in operating margin through 2017.
The final report on the list came from Jefferies, which issued a Buy rating and $40 price target.
The stock was highlighted as a great opportunity to capitalize on the demand for animal protein and companion animal medical markets. An expectation of slow near-term growth is based on over-exposure to North America, but with a strong push into emerging markets, the report stated that growth will kick into gear in the long-term. The report also cited the scarcity value of the stock as a large cap animal health play.
Overall the Hold equivalent ratings seemed weak. They presented bullish cases but refused to act on them with Buy ratings. The downside that these reports presented was also so limited that it's confusing why a stronger rating wasn't issued when the reports carried such conviction to the upside.
The Buy equivalent ratings were stronger, with the ratings from Piper Jaffray and Jefferies presenting the most interesting takes to the bullish side. While most of the reports looked at the company as a pharmaceutical play, both Piper and Jefferies placed it as an animal health play, stating that they rated it with that in mind.
Following the series of reports, Zoetis has traded down 1.15 percent to $33.43.
Latest Ratings for ZTS
|Sep 2016||Bank of America||Initiates Coverage on||Buy|
|Sep 2016||Argus Research||Maintains||Below Average|
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