Will Zoetis Earnings Deliver on Post-Spinoff Growth?
Zoetis will release its quarterly report on Tuesday, and investors will get their first look at the company as a completely independent business entity. Although the company came public toward the beginning of the year, the recent move from former parent Pfizer to divest itself entirely of its stake in Zoetis will give the animal-health company free rein to operate. Based on recent share-price moves, investors are anxious about whether Zoetis earnings will grow fast enough to satisfy expectations.
Pfizer created Zoetis to hold the company's animal-health medicine and vaccine production division, with the expectation that the business would benefit from generally favorable demographic trends supporting agriculture while freeing up Pfizer to focus on its pharmaceutical business. But Zoetis faces plenty of competition as rivals have recognized the solid growth potential in the animal-health industry. Let's take an early look at what's been happening with Zoetis over the past quarter and what we're likely to see in its quarterly report.
Stats on Zoetis
Analyst EPS Estimate
Change From Year-Ago EPS
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Source: Yahoo! Finance. *Uses pro forma figures for comparison. **In two quarters since IPO.
How much can Zoetis earnings grow?
In recent months, analysts have held their views on Zoetis earnings steady, with changes neither to their near-term June quarter estimates nor to their long-range 2013 and 2014 forecasts. The stock, though, hasn't performed well, falling more than 8% since the end of April.
Much of those losses likely stemmed from the transaction by which Pfizer got rid of its 80% stake in Zoetis during the quarter. At the end of June, Pfizer agreed to accept 405 million shares of its own stock in exchange for almost 401 million shares of Zoetis stock that Pfizer owned, essentially offering a small premium to encourage exchanges for Zoetis shares and thereby temporarily inflating the Zoetis stock price. With the offer over, it was reasonable for investors to take away that temporary premium and send shares somewhat lower.
But having gained its full independence, Zoetis will now have to deal with competing animal-health businesses that still have the financial support of much larger parent companies. Both Merck's animal health division and Sanofi's Merial division produced slightly better sales-growth rates in 2012 than Zoetis did. Merck has identified the unit as a growing part of its overall business, with plans to move the division's physical location onto its U.S. headquarters, while Merial produces the well-known veterinary brands Heartgard and Frontline. With even bigger growth recently, the relatively small Elanco unit of Eli Lilly represents a greater portion of Lilly's overall revenue than its rivals. All four companies recognize the value of stronger intellectual property protection without patent cliffs to deal with.
Still, Zoetis is making moves to accelerate its growth. Its decision to expand its Nebraska plant to allow third parties to make their products there as well as Zoetis' own proprietary products should help it take greater advantage of its manufacturing capacity. It'll take a couple years for the expansion to take shape, but it should eventually help make the facility more profitable.
In the Zoetis earnings report, be sure to watch for strategic vision statements from the company's management as it starts moving forward on its own path. With its status as a pure play on animal health, Zoetis should attract attention from investors interested in the profit potential from the agricultural industry.
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The article Will Zoetis Earnings Deliver on Post-Spinoff Growth? originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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