In this article, let's take a look at Zoetis Inc. (ZTS, Financial), a $18.88 billion market cap company, which is a global leader in the animal health products industry and emerged as a separate entity following its spin-off from Pfizer (PFE, Financial) in June 2013.
Number one
Zoetis is the clear leader in the global animal health industry and is the world's leading producer of drugs, vaccines and related items for farm and companion animals.
Of an estimated $23 billion global animal health market, Zoetis has almost 20% market share. Other key competitors include Merck Animal Health (MRK, Financial); Merial, the animal health division of Sanofi S.A. (SNY, Financial); Elanco, the animal health division of Eli Lilly (LLY); Bayer Animal Health (BAYRY, Financial); and Novartis Animal Health (NVS, Financial). Since this industry lacks large payers like Medicare, single-payer governments or large insurance companies, the firm maintains significant pricing power.
Revenues and global infrastructure gives the firm a cost advantage over competitors, and we think its size and scale should be a competitive advantage and this will contribute to above than average margins due to its scale.
Principal drivers
When we think about drivers of long term profitability, we see acquisitions, technology and strategic alliances or divestitures as well. The company focuses on provide customers with innovative products and services; and places emphasis on R&D. Zoetis is working on the development of new vaccines for emerging infectious diseases in animals.
Emerging markets
We believe that standards of living in emerging markets are going to improve, and as a consequence, it should increase the meat-heavy diets, driving greater demand for livestock products.
Family member
We project that the company will benefit from the increase in the number of pets at home, as they are considered as members of the family, and so, expensive treatments can be paid.
Revenues, margins and profitability
Looking at profitability, revenues increased by 4.02% and led earnings per share slightly increased in the most recent quarter compared to the samequarter a year ago ($0.27 vs $0.26). During the past fiscal year, the company turned its bottom line around. It earned $1.01 versus -$0.02 in the prior year. This year, Wall Street expects an improvement in earnings ($1.53 versus $1.01). The gross profit margin is considered high; at 68.30%. The net profit margin of 11.68% is similar to the industry average.
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 | 53.56 |
| JAZZ | Jazz Pharmaceuticals | 6.54 |
| AGN | Allergan Inc. | 20.32 |
| TEVA | Teva Pharmaceuticals | 11.44 |
| VRX | Valeant Pharmaceuticals | -13.67 |
| MYL | Mylan Inc. | 50.84 |
| Â | Industry Median | 8.62 |
The company has a current ROE of 53.56% which is higher than the industry median and the ones exhibit by its peers: Jazz (JAZZ, Financial), Allergan (AGN, Financial), Teva (TEVA, Financial), Valeant (VRX, Financial) and Mylan (MYL, 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 35.8x, a price-to-book ratio of 15.10x and a price-to-sales ratio of 4.09x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
We think the firm will benefit with the industry growth, so Zoetis should boost its revenue in the next couple of years. With standards of living improving and animals increasingly viewed as family members too, we think Zoetis has a bright future. Further, the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus George Soros (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
