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Zoetis Inc. Quarterly Valuation – March 2015 $ZTS

Zoetis_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Zoetis Inc. (ZTS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Zoetis Inc is engaged in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. The primary livestock species are cattle (both beef and dairy), swine, poultry, sheep and fish, and the primary companion animal species are dogs, cats and horses. In February 2014, Benchmark Holdings PLC purchased aquaculture vaccine and development assets from animal health company Zoetis Inc.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $46.79
MG Value $35.04
MG Opinion Overvalued
Value Based on 3% Growth $13.20
Value Based on 0% Growth $7.74
Market Implied Growth Rate 21.46%
Net Current Asset Value (NCAV) -$3.64
PEmg 51.42
Current Ratio 3.19
PB Ratio 17.96

Balance Sheet – December 2014

Current Assets $3,465,000,000
Current Liabilities $1,086,000,000
Total Debt $3,643,000,000
Total Assets $6,607,000,000
Intangible Assets $1,703,000,000
Total Liabilities $5,296,000,000
Outstanding Shares 503,300,000

Earnings Per Share

2014 $1.16
2013 $1.01
2012 $0.87
2011 $0.49
2010 $0.22
2009 -$0.20
2008 $0.00
2007 $0.00
2006 $0.00
2005 $0.00
2004 $0.00

Earnings Per Share – ModernGraham

2014 $0.91
2013 $0.68
2012 $0.44
2011 $0.18
2010 $0.02
2009 -$0.07

Dividend History

Conclusion:

Zoetis Inc. (ZTS) is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the short operating history as a publicly traded company, along with the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued despite growing its EPSmg (normalized earnings) from $0.02 in 2010 to $0.91 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 21.46% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Zoetis Inc. (ZTS) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Zoetis Inc. (ZTS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Zoetis Inc. (ZTS) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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