Billionaire Steve Cohen’s SAC Owns Nearly 8% of Zoetis Inc (ZTS)

SAC Capital Advisors, the hedge fund managed by billionaire Steve Cohen and his team, has filed a 13G with the SEC to report that it owns 7.6 million shares of Zoetis Inc (NYSE:ZTS), an animal pharmaceuticals company which was spun out from Pfizer in February (the stock is about flat from its levels in early February). According to the filing, this gives the fund control of 7.7% of the total outstanding shares. We track quarterly 13F filings from hundreds of hedge funds, including SAC, as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can see from our database that Cohen had owned about 730,000 shares as of the end of March (find SAC’s favorite stocks), so most of the fund’s purchases have come in the last few months rather than immediately after the spinout.

Zoetis Inc (NYSE:ZTS) has released a 10-Q for the first quarter of 2013, though investors should of course be aware that as a recent spinout the company is in a period of transition and that any comparison to a year ago will not be completely perfect. In any case, the report shows Zoetis Inc (NYSE:ZTS)’s revenue grew by 4% during the quarter compared to Q1 2012, and earnings were up even if we add back higher restructuring charges in the prior year period. The 10-Q showed net income of $140 million for the quarter- 28 cents per share- and about $280 million in cash flow from operations, with little capital expenditures required.

If we annualize last quarter’s earnings per share figure we get a P/E multiple of 28. Wall Street analysts are expecting $1.62 in EPS for 2014, which would require improvements on the bottom line. We’d note that many hedge funds and value investors like to invest in spinouts on the theory that management of the new company is better able to focus on operations without having to concern themselves with the needs and initiatives of the parent company. Read more about investing in spinouts. However, many market players are bearish as shown by the fact that 19% of the float is held short.

We’d consider Merck on that basis, but would be a bit concerned about the degree to which its valuation depends on future earnings growth. In fact, right now analysts seem to be expecting significant earnings growth at a number of these companies, including Zoetis Inc (NYSE:ZTS) itself, and with financial performance not looking good in a number of cases we’d be wary of treating any of these stocks as value plays.

Disclosure: I own no shares of any stocks mentioned in this article.