Zoetis’ Price Target Raised to $167 on Strong Companion Animal Trends, $203 in Best-Case Scenario: Morgan Stanley

Zoetis Inc’s, the world’s largest producer of medicine and vaccinations for pets and livestock, price target was raised to $167 from $125, largely driven by higher multiple assumptions, according to Morgan Stanley equity analyst David Risinger, who also said better-than-anticipated performance in the face of COVID-19 pressures has caused the increase for this year’s and 2021’s EPS to 9% and 6%, respectively.

Early this month, the animal health company said its revenue came in at $1.5 billion for the second quarter of 2020, which is flat compared with the same quarter a year earlier. Net income for the second quarter of 2020 was $377 million, or $0.79 per diluted share, an increase of 2% and 3%, respectively.

Revenue in the U.S. segment was $823 million, an increase of 6% compared with the second quarter of 2019. However, Revenue in the international segment was $708 million, a decrease of 5% on a reported basis and an increase of 3% operationally compared with the second quarter of 2019.

Zoetis forecasts its full-year 2020 revenue between $6.300 billion and $6.475 billion, reported diluted EPS between $3.14 and $3.32 and adjusted diluted EPS between $3.52 and $3.68.

“We increased our revenue in 2020e by 4% (from $6.2 billion to $6.5 billion) and 4% in 2021e (from $6.7 billion to $7.0 billion). We increase our EPS in 2020e by 9% (from $3.35 to $3.66) and 6% in 2021e (from $3.94 to $4.18). In addition, we significantly raise our price target from $125 (32x 2021e EPS of $3.94) to $167 (40x 2021e EPS of $4.18). We are increasing our multiple targets because the market is assigning higher multiples to “best of breed” companies, and Zoetis is the #1 company in the Animal Health industry,” said David Risinger, equity analyst at Morgan Stanley.

“Since we had assigned a PT of $125 on April 2, the S&P 500 has traded up +35% and NASDAQ has traded up +49%. Zoetis’ stock is trading close to all-time high absolute P/E and relative P/E multiples. ZTS multiple has expanded as it has outgrown peers, delivered earnings upside, and benefited from the premium the stock market is assigning to best-in-class companies,” Risinger added.

Morgan Stanley target price under a bull-case scenario is $203 and $137 under the worst-case scenario. Several other equity analysts have also updated their stock outlook. The brokerage currently has an “equal weight” rating on the stock. Credit Suisse Group reiterated a “buy” rating and set a $147.00 target price.

Twelve analysts forecast the average price in 12 months at $166.00 with a high forecast of $185.00 and a low forecast of $150.00. The average price target represents a 4.71% increase from the last price of $158.54. From those 12, seven analysts rated ‘Buy’, five analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

“Zoetis has compelling long-term prospects, but COVID-19 and recession impacts could drive earnings downside near-term. We believe the company’s high quality is balanced by high stock valuation. Faster growth, positive new product developments, and tuck-in M&A potential yield Bull Case upside. Financial shortfalls, competitive pressures and new product disappointments yield Bear Case downside,” Morgan Stanley’s Risinger added.

Upside risks: 1) Faster rebound post-COVID in vet clinics and livestock; 2) Greater Companion Animal demand, especially in parasiticides and key dermatology products; 3) Faster uptake of Simparica Trio; 4) MAb candidates for pain in cats and dogs remain on track to launch in 2021 -highlighted by Morgan Stanley.

Downside risks: 1) Competitors could garner the approval of products which compete with Zoetis’ key Companion Animal growth drivers and 2) COVID’s negative impact on the livestock business could persist longer than expected, and 3) Stock multiple could contract if stock market money flows shift toward cyclical.