Stifel Drops Bullish Zoetis Thesis After 108% Outperformance

The bullish case for Zoetis Inc (NYSE: ZTS) has come to an end after the stock outperformed the S&P 500 index by 108 percent since spinning out from Pfizer Inc. (NYSE: PFE), according to Stifel.

The Analyst

Stifel's Jonathan Block downgraded Zoetis from Buy to Hold with a $95 price target. 

The Thesis

Zoetis' management team deserves credit for "near-flawless" execution over the years, but the time to buy the stock has passed, Block said in the downgrade note. (See his track record here.)

On the product side, the company's "Big 3" products — Apoquel, Cytopoint and Simparica — accounted for 50 percent of revenue growth in 2016 and 56 percent of revenue growth in 2017. The law of large numbers suggests a slowdown of growth in 2019 and 2020, and any new material product cycle in the pipeline is unlikely to be seen within the next 18 months, the analyst said. 

The cattle business, especially dairy, remains under pressure and comps will become increasingly difficult in the coming quarters, Block said. It's hard to imagine a scenario of revenue upside with the product cycle being several years old, he said. 

Zoetis shares are trading at 27 times 2019 estimated EPS and 24 times 2020 EPS estimated EPS, which implies a 57-percent premium to the S&P 500 index versus the three-year average of 37 percent, Block said. A premium valuation is warranted, but at current levels the case to justify incremental expansion is difficult to make, he said. 

Price Action

Zoetis shares were trading down 2.35 percent to $89.93 off the open Wednesday. 

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