Zoetis Inc. Analysis – July 2015 Update $ZTS
Benjamin 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 – July 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 stock analysis showing 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 Company markets products across four regions: the United States, Europe/Africa/Middle East, Canada/Latin America and Asia/Pacific; eight species: the livestock species of cattle, swine, poultry, sheep and fish, and the companion animal species of dogs, cats and horses, and five product categories: anti-infectives, vaccines, parasiticides, medicated feed additives and other pharmaceutical products. In addition, its Client Supply Services (CSS) organization provides contract manufacturing services to third parties.
[level-free]
To read the rest of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.
[/level-free]
[level-mg-stocks-screens-subscriber]
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $48.68 |
| MG Value | $46.07 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $17.35 |
| Value Based on 0% Growth | $10.17 |
| Market Implied Growth Rate | 16.09% |
| Net Current Asset Value (NCAV) | -$4.06 |
| PEmg | 40.68 |
| Current Ratio | 2.27 |
| PB Ratio | 19.17 |
Balance Sheet – March 2015
| Current Assets | $3,110,000,000 |
| Current Liabilities | $1,370,000,000 |
| Total Debt | $3,243,000,000 |
| Total Assets | $6,430,000,000 |
| Intangible Assets | $1,904,000,000 |
| Total Liabilities | $5,152,000,000 |
| Outstanding Shares | 503,200,000 |
Earnings Per Share
| 2015 (estimate) | $1.61 |
| 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 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $1.20 |
| 2014 | $0.91 |
| 2013 | $0.68 |
| 2012 | $0.44 |
| 2011 | $0.18 |
| 2010 | $0.02 |
Dividend History
Free Cash Flow
Conclusion:
Zoetis Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short history as a stand-alone company, and 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, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.18 in 2011 to an estimated $1.20 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 16.09% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
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 any 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.
[/level-mg-stocks-screens-subscriber]
