Zoetis stock closed down marginally after Raymond James downgraded the company from Outperform to Market Perform while maintaining the same $192 price target.
Zoetis (ticker: ZTS), which claims to be the world’s largest animal-health company, has had a strong year in the market, with shares gaining 22% compared with the S&P 500 index’s 17.4% return. Raymond James analyst Elliot Wilbur notes that the stock has outperformed the ProShares Pet Care exchange-traded fund (PAWZ) by 11% year to date.
Zoetis stock closed Friday down 0.3%, at $199.68, and was flat in after-hours trading. The S&P 500 was down 0.8%, while the ProShares Pet Care ETF was down 0.1%.
The company was a subsidiary of Pfizer (PFE) before being spun off into a separate company in 2013. Zoetis develops vaccines and medicines for eight different species; 55% of its revenue comes from products for companion animals with the rest derived from farm animal products.
Wilbur agrees that Zoetis remains a leader in an industry which continues to show signs of growth potential. During the pandemic, increased time at-home meant that people were paying more attention to their pets, which leads to increased care from owners, he writes. Zoetis also reaped benefits from the pandemic, experiencing double-digit operational companion-animal growth through 2020. Additionally, the successful launch of Simparica Trio, a parasiticide for dogs, further bolstered the company’s bottom line.
Yet Wilbur argues that the company’s valuation is getting out of hand, pointing out that the company trades at an enterprise value-to-consensus Ebitda (earnings before interest, taxes, depreciation, and amortization) ratio of 27.2—within 10% of its all-time-high.
While the pandemic accelerated growth within the animal healthcare industry, it’s unclear whether this momentum will continue in the future. Wilbur believes that the reopening of the economy and the return to offices will cause the accelerated growth to revert to normal base rates, thereby reducing upside in the stock.
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