Pharmaceuticals Stocks

Zoetis Inc. Valuation – October 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 10 Most Undervalued Companies for the Defensive Investor – October 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.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ZTS – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $21,344,560,102 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.11 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 10600.00% Pass
6. Moderate PEmg Ratio PEmg < 20 43.05 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 18.43 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.11 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.86 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ZTS value Chart October 2015

EPSmg $1.01
MG Growth Estimate 15.00%
MG Value $38.76
Opinion Overvalued
MG Value based on 3% Growth $14.60
MG Value based on 0% Growth $8.56
Market Implied Growth Rate 17.28%
Current Price $43.34
% of Intrinsic Value 111.83%

Zoetis Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned by the short history, and the high PEmg and PB ratios, while 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 further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.22 in 2011 to an estimated $1.01 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 17.28% 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 below 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.

Stage 3: Information for Further Research

ZTS Charts October 2015

Net Current Asset Value (NCAV) -$4.21
Graham Number $7.43
PEmg 43.05
Current Ratio 2.11
PB Ratio 18.43
Dividend Yield 0.72%
Number of Consecutive Years of Dividend Growth 3

 

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Most Recent Balance Sheet Figures

Total Current Assets $3,316,000,000
Total Current Liabilities $1,572,000,000
Long-Term Debt $3,243,000,000
Total Assets $6,598,000,000
Intangible Assets $1,864,000,000
Total Liabilities $5,422,000,000
Shares Outstanding (Diluted Average) 500,173,000

Earnings Per Share History

Next Fiscal Year Estimate $1.04
Dec14 $1.16
Dec13 $1.01
Dec12 $0.87
Dec11 $0.49
Dec10 $0.22

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.01
Dec14 $0.91
Dec13 $0.70
Dec12 $0.46
Dec11 $0.22
Dec10 $0.07

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Pharmaceuticals Industry – August 2015
The 16 Best Stocks For Value Investors This Week – 8/1/15
Zoetis Inc. Analysis – July 2015 Update $ZTS
27 Companies in the Spotlight This Week – 4/4/15
Zoetis Inc. Quarterly Valuation – March 2015 $ZTS

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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