Zoetis Inc. (ZTS, Financial) is a leading animal health company with a diversified product portfolio of medicines and vaccines that aim to treat and protect livestock and companion animals.
The stock has gained around 14% so far this year.
I see plenty of reasons to like Zoetis currently, with the first being management's ambitious plan to create value.
A plan to create value and growth
In May, Zoetis' management team revealed its plans to create value and growth during its Investor Day. The company has plenty of growth opportunities in its dermatology, pet parasiticides and osteoarthritis pain franchises that can boost revenue.
"Our growth and value creation is rooted in the right strategy, a diverse portfolio, our leadership in innovation, and global capabilities that allow us to capitalize on the opportunities we see in an attractive Animal Health market," CEO Kristin Peck said. "We pride ourselves on shaping animal health and creating new markets based on game-changing innovations. Based on our track record and talented colleagues, we are confident in our ability to broaden our existing billion-dollar franchises, while innovating and building new ones through continued investments in R&D, supply chain, and commercial excellence,"
At the same time, it is nice to see the Parsippany, New Jersey-based company has a vision to create value for shareholders over the next three to five years based on several catalysts. These catalysts include growing revenue as a result of the franchises, improving return on invested capital and expanding margins.
Zoetis also has strong fundamentals, which show its stock performs very well in not just one, but several important financial metrics.
High profitability and growth
At $168.24, Zoetis shares trade with a price-earnings ratio of 37.82, a price-sales ratio of 9.7 and a price-book ratio of 17.24.
The GF Value of $203.93 indicates the stock is modestly undervalued based on its historical ratios, past financial performance and analysts' future earnings projections. Further, is has an upside potential of nearly 22% should the gap between the GF Value and the current share price close completely.
The GF Score of 98 out of 100 indicates Zoetis has very high outperformance potential, driven by solid ratings for profitability, growth, momentum and value as well as a more moderate financial strength rank.
The predictability rank of four out of five is also very good. According to GuruFocus research, companies with this rank return an average of 9.80% annually over a 10-year period.
Before analyzing the profitability and growth, a quick look at Zoetis' financial health is essential.
The company has a debt-to-equity ratio of 1.5, which seems a bit high at first glance. However, despite being a bit volatile over the past five years, Zoetis generates consistent positive free cash flow. Further, its interest coverage ratio of 12.41 is very high and is not a concern. Liquidity is also very strong. The current ratio of 3.27 and quick ratio of 1.94 are very healthy. Due to the fact the company has been very profitable over the past five years, which is reflected in its rising retained earnings, growing from $3.27 billion in 2018 to $8.67 billion in 2022, it can repay its debt.
Turning now to profitability, Zoetis’ operating margin is expanding. It was 36.40% as of March, with a five-year average growth rate of 2.70% per year. The gross margin of 70.60% and net margin of 27.60% are also very high.
The company's return on equity of 49.62% is also exceptionally high and is ranked better than 97.46% of the 1,022 companies operating in the drug manufacturers industry. The ROE was high over the past four consecutive quarters, and only back in March 2022 was it higher at 51.73%.
Zoetis has plenty of growth ahead, too. The three-year revenue growth rate is 9.8% and the three-year earnings per share without non-recurring items growth rate is 13%. The future three to five-year total revenue growth rate is 6.51%, which is considered strong.
Final thoughts
Overall, Zoetis' shares look attractive. The company's profitability is very strong, there is growth ahead and management is focused on creating value for shareholders with a number of strategic business priorities. As a result, the future looks exciting for this animal health company.
