In the middle of June, billionaire Steven Cohen, who is managing more than $20.7 billion in total assets under management, significantly increased his holding in the veterinary pharmaceuticals maker Zoetis Inc (NYSE:ZTS), from 727,000 shares to more than 7.6 million shares. Interestingly, Zoetis is in the portfolios of many other famous investors including Paul Tudor Jones, George Soros, and Jean-Marie Eveillard.
Recently, Zoetis became a fully independent publicly traded company after a share exchange with its ex-parent Pfizer Inc. (NYSE:PFE). Let’s take a closer look to determine whether or not we should buy Zoetis at its current trading price.
A leading animal health company
Zoetis is the global manufacturer of more than 300 medicines and vaccines products for animals in 120 countries, operating in two main business segments: livestock and companion animal. Around $2.77 billion, or 66% of the total revenue, was generated from the livestock segment while the companion animal segment contributed around $1.43 billion in revenue.
Zoetis Inc (NYSE:ZTS) could be considered the largest company in animal medicines and vaccines in the world, with around $4.2 billion in revenue in 2011, holding 19% of the $22 billion global animal health market. Although most of Zoetis’ revenue, around 40%, was derived from the U.S. market, Zoetis also generated a lot of revenue from the emerging markets including China, India, Brazil, representing around 27% of its total revenue in 2011.
What might excite investors is the company’s good growth. In the first quarter of 2013, Zoetis Inc (NYSE:ZTS) experienced growth on both top and bottom lines. Revenue increased 4% to nearly $1.1 billion, while net income rose 26%, from $111 million in the first quarter last year to $140 million this year. Its EPS came in at $0.28 per share, 27% higher than the first quarter of 2012.
For the full year 2013, Zoetis expects to generate around $4.43 billion to $4.53 billion in revenue, with diluted EPS expected to stay in the range of $1.00 to $1.06 per share. The market seems to value Zoetis Inc (NYSE:ZTS) quite expensively, at 16.5 times its trailing EBITDA (Earnings before interest, taxes, depreciation, and amortization).
Expensive valuation
Compared to its much smaller publicly traded peers IDEXX Laboratories, Inc. (NASDAQ:IDXX) and VCA Antech Inc (NASDAQ:WOOF), Zoetis seems to be quite richly valued. IDEXX is trading at $90.30 per share with a total market cap of around $4.8 billion. The market values IDEXX at 15.4 times its trailing EBITDA. IDEXX’s main operating business segment is the companion animal group, delivering more than $1 billion in revenue and more than $203 million in profit in 2012.
For the full year 2013, IDEXX expects to increase its revenue by around 7% or more to a range of $1.38 billion – $1.39 billion, with organic growth staying around 7.5% to 8%. EPS is estimated to come in at $3.40 to $3.46 per share. What might make investors like IDEXX is its recent share buyback authorization. In the middle of May, IDEXX planned to repurchase an additional 4 million shares, in additional to 2.22 million shares remaining under the existing share repurchase program. The share buyback could ultimately boost the company’s EPS and push up the share price in the near future.
VCA Antech is the cheapest among the three companies. At $25.10 per share, VCA is worth around $2.25 billion on the market. The market values VCA at only 9.2 times its trailing EBITDA. The company could be considered a leader of animal healthcare in the U.S. and Canada, providing different veterinary services and diagnostics testing, operating in two main business segments: Animal Hospital and Laboratory.
VCA operates 604 animal hospitals with more than 3,100 doctors; treating more than 2.5 million pets with more than 6.6 million annual pet visits. For the full year, VCA expects to generate around $1.82 billion to $1.85 billion in revenue with adjusted EPS staying in the range of $1.59 to $1.69. VCA recently authorized a new share buyback program to buy back up to $125 million of the company’s shares on the open market.
My Foolish take
Zoetis Inc (NYSE:ZTS), with a global leading position in the animal health industry, seems to deserve the higher premium compared to its much smaller peers. The growing middle class, with the increasing demand for milk and meat, could be an opportunity for growth for the company’s livestock business. Indeed, Zoetis could be considered a stock for healthcare investors to buy and hold for the long run. However, with an expensive price tag, I would rather wait for a lower price to grab the company’s shares.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends VCA Antech.
The article Should Investors Buy This Animal Health Company Now? originally appeared on Fool.com.
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