Marginal Earnings Beat at Zoetis, View Maintained

Zacks

Zoetis Inc.’s (ZTS) first quarter 2014 earnings (excluding special items) of 38 cents per share beat the Zacks Consensus Estimate by a penny and the year-ago figure by 2 cents. Impressive U.S. sales of the company’s products aided results in the reported quarter. Including one-time items, Zoetis reported earnings of 31 cents per share, up 11%.

Revenues at Zoetis climbed to $1.1 billion in the first quarter of 2014, up 1%. Foreign currency movements adversely impacted revenues during the quarter by 3%. Revenues were just short of the Zacks Consensus Estimate of $1.13 billion.

Zoetis boasts of a robust and diversified product portfolio. The product portfolio is divided into five categories – anti-infectives, vaccines, parasiticides, medicated feed additives and other pharmaceuticals for veterinarians and livestock producers. Zoetis markets its offerings primarily across the following species: cattle, swine, poultry, others (livestock) and dogs, cats and horses (companion animals). In the first quarter of 2014, sales of livestock products accounted for 64.4% of total revenues. The balance came from the companion animal products.

Geographically, the company operates in four segments: the U.S, Europe/Africa/Middle East (EuAfME), Canada/Latin America (CLAR) and Asia/Pacific (:APAC). Sales improved in the U.S. by 6%. However, sales in the EuAfME, CLAR and APAC markets declined 3%, 2% and 3%, respectively. The growth rates are inclusive of foreign exchange impact. We note that Zoetis is the former Animal Health business of Pfizer Inc. (PFE). Zoetis started trading on the New York Stock Exchange from Feb 1, 2013.

2014 Outlook Maintained

Zoetis maintained its outlook for 2014, provided in February this year, while releasing the fourth quarter and full-year 2013 results. The company still expects revenues in the range of $4.65–$4.75 billion. Adjusted earnings are still projected in the range of $1.48–$1.54 per share. The Zacks Consensus Estimate (pre-earnings) hints at earnings of $1.53 per share on revenues of $4.73 billion.

Our Take

The numbers put out by Zoetis in the first quarter of 2014 are nothing to write home about. In February, the company had issued disappointing 2014 guidance (top and bottom lines) in anticipation of soft sales from the U.S. livestock market. Management had stated at that time that there will be fewer animals to treat in the feedlots as ranchers rebuild the herds following the drought. Increased costs are expected to hurt the bottom line. The reaffirmation of the guidance implies that the bleak picture has not changed.

We are, however, encouraged by Zoetis’ efforts to increase its presence in emerging markets, which provide substantial opportunity for growth.

Zoetis carries a Zacks Rank #3 (Hold). Examples of better-ranked stocks in the medical sector are Alexion Pharmaceuticals (ALXN) and Gilead Sciences (GILD).  Both stocks hold a Zacks Rank #1 (Strong Buy).

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