In this article, let's take a look at Zoetis Inc (ZTS, Financial), a $22.24 billion market cap company that is a global leader in the animal health products industry emerged as a separate entity following its spin-off from Pfizer (PFE, Financial) in June 2013.
Favorable industry
The global animal health market, which is estimated at $23 billion, is expected to grow and this should benefit the pharma company to grow revenue at a desired mid-single rate.
Emerging markets
The company operates in 70 countries, and, considering non-direct channels, it reaches 50 nations. Revenues by regions are distributed as follows: U.S. operations accounted for about 42% of total 2013 revenues; Europe, Africa and the Middle East for 25%; Canada and Latin America for 17%; and Asia/Pacific for 16%. Emerging markets including Brazil, China and India accounted for 26% of sales in 2013.
The firm is the largest leader in the global animal health industry with almost one-fifth of the market share. As economies of emerging markets are improving we expect more meat-heavy diets. In such markets, the firm has a scale that allows it to use its own salesforce. This is important because other competitors that are smaller need other expensive distributors.
Management
Completing a leadership transition that began in April, Paul Herendeen was named the new executive vice president and chief financial officer with an experience of more than 30 years, including 16 years as CFO of Warner Chilcott and MedPointe. I expect a more aggressive control of costs and capital allocation.
Revenues, margins and profitability
Looking at profitability, revenue grew by 9.54% led earnings per share increased in the most recent quarter compared to the samequarter a year ago ($0.33vs $0.26).
The gross profit margin is considered high; at 67.54% and the net margin is ranked higher than 83% of the 859 Companies in the Drug Manufacturers - Specialty & Generic industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ZTS | Zoetis | 51.24 |
| ACT | Actavis PLC | -8.47 |
| MYL | MylanInc | 28.67 |
| TEVA | Teva Pharmaceutical Industries Ltd | 11.95 |
| Â | Industry Median | 6.84 |
The company has a current ROE of 51.24% which is higher than the industry median and the ones exhibit by Actavis (ACT, Financial), Mylan (MYL, Financial) and Teva Pharmaceutical (TEVA, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment.It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 39.6x, trading at a discount compared to an average of 45.3x for the industry. To use another metric, its price-to-book ratio of 16.31x indicates a premium versus the industry average of 3.54x while the price-to-sales ratio of 4.71x is above the industry average of 3.98x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
We believe that growth could be achievable through acquisitions, advances in technology or even divestitures of some of its businesses.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Bill Ackman (Trades, Portfolio) and John Keeley (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
