Zoetis Tops Q3 Earnings, Ups 2015 Bottom-Line Guidance

Zacks

ZoetisZTS third-quarter 2015 adjusted earnings of 50 cents per share were ahead of the Zacks Consensus Estimate of 40 cents. Earnings were also above the year-ago figure by 9 cents.

Revenues at Zoetis remained flat year over year to $1.2 billion in the third quarter of 2015. Foreign currency movements impacted revenues negatively. Revenues also came in line with the Zacks Consensus Estimate.

Quarterly Details

Zoetis boasts a robust and diversified product portfolio. The company markets its offerings primarily across the following species: cattle, swine, poultry, others (livestock) and dogs, cats and horses (companion animals). In the third quarter of 2015, sales of livestock products accounted for 61.8% of total revenue. Approximately 37.1% of revenues in the quarter came from the sale of companion animal products, while the balance came from contract manufacturing.

Geographically, the company has consolidated its four-region structure to a two-region structure comprising the U.S. and International.

Sales improved in the U.S. by 19% to $632 million driven by strong sales of livestock and companion animal products. Sales at the International segment were down 15% to $622 million (up 2% operationally).

Recently, the company announced that it has entered into an agreement to acquire PHARMAQ for $765 million on a debt-free basis. Addition of PHARMAQ will strengthen Zoetis’ core livestock business and make it a market leader in this segment. PHARMAQ generated revenues of approximately $80 million in 2014.

Outlook Updated

Zoetis updated its guidance to reflect its year-to-date performance and the anticipated impact of foreign exchange rates. For 2015, excluding one-time items, earnings are expected in the range of $1.70 to $1.74 per share (previous guidance: $1.63 to $1.68 per share). The Zacks Consensus Estimate of $1.66 is below the guidance range. The company expects revenues to be between $4.7 billion and $4.75 billion (previous guidance: $4.7 billion to $4.775 billion).The Zacks Consensus Estimate is $4.756 billion.

The company updated its outlook for 2016 and 2017 as well. 2016 earnings are expected to be in the range of $1.84 to $1.94 per share on revenues of $4.75 billion to $4.875 billion. The Zacks Consensus Estimate is $1.89 on revenues of $4.764 billion.

In 2017, earnings are expected to be in the range of $2.24 to $2.38 per share on revenues of $5.025 billion to $5.225 billion.

Our Take

We are impressed with the company beating on earnings by a wide margin. However, the negative impact of foreign exchange rates continues to hurt revenues. Nevertheless, we are positive on the company’s PHARMAQ acquisition. We expect to see more of such acquisitions/deals at the company in the near future as it continues to focus on its strategy of acquiring complementary businesses and products.

Zoetis carries a Zack Rank #4 (Sell). Some better-ranked stocks in the health care sector include Gilead Sciences Inc. GILD, Aerie Pharmaceuticals, Inc. AERI and Regeneron Pharmaceuticals, Inc. REGN, each carrying a Zacks Rank #2 (Buy).

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