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Analyst: Zoetis Deserves To Trade At A Premium

by
November 29, 2017 10:52 am
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Zoetis Inc (NYSE:ZTS), a global leader in animal health products, continues to benefit from favorable industry trends — which is attracting the attention of investors and Wall Street analysts.

The Analyst

Morgan Stanley's David Risinger upgraded Zoetis' stock rating from Equal-weight to Overweight with a price target boosted from $70 to $80.

The Thesis

Zoetis holds an approximate 20 percent market share in the global animal health market with a well-diversified and durable portfolio, Risinger said in an upgrade note. (See Risinger's track record here.) 

No single product accounts for more than 10 percent of the company's total revenue, and the two biggest products — ceftriofur and Apoquel — each account for 7 percent in revenue, the analyst said. The average lifespan of the company's top 24 products is 30 years, demonstrating the "durability of the animal health portfolio in contrast to human pharma companies," which have to grapple with patent expiration on key products.

Looking forward, Zoetis is well-positioned to benefit from rising animal protein consumption (58 percent of total revenue) and the trend toward better care of pets (42 percent of revenue), according to Morgan Stanley.

This should support ongoing earnings growth of a 12 percent compounded annual growth rate and give investors confidence in management's target of 200 basis points of gross margin improvement from 2017's estimated level of 67 percent, Risinger said.

The company's cash flow generation is expected to grow faster than its net income due to efficient working capital management, restructuring and operational efficiency initiatives, the analyst said. 

The analyst's prior stance on Zoetis' stock was based on a high valuation versus the S&P 500 index, but given the multiple drivers to support growth ahead, the stock warrants a premium valuation, according to Morgan Stanley. An $80 price target is based on a 26x 2019 EPS estimate of $3.13, which is in-line with the stock's current 26.4x next-twelve-months EPS.

Price Action

Shares of Zoetis are higher by more than 30 percent since the start of 2017.

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