DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 3 February 2016 Americas/United States Equity Research Animal Health Zoetis (ZTS) Rating OUTPERFORM Price (02-Feb-16,US$) 41.72 Target price (US$) 58.00 52-week price range 55.38 - 39.65 Market cap (US$ m) 20,773.24 Enterprise value (US$ m) 23,807.24 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Erin Wilson 212 538 4080 [email protected]INITIATION Leader of the Pack: Top Pick in Animal Health We Are Initiating Coverage of Zoetis with an Outperform Rating and $58 TP: As the global leader in therapeutics for livestock and companion animals, ZTS is highly levered to rebounding industry fundamentals, and earnings growth should accelerate over an improving cost and capital structure. Our focus is on underappreciated efficiency initiatives that should drive over 900 bps operating margin expansion by 2017, a considerable feat for a company of its size that ensures double-digit EPS growth in 2017 and beyond. Constructive on Fundamentals, Cost Structure: While restructuring will curtail NT growth, rebounding demand, as supported by proprietary survey work, should drive consistent revenue growth of 5-7%. New products and services, a business mix increasingly skewed toward faster-growing geographies and species, and efforts to optimize operations as an independent company should fuel revenue growth ahead of the industry and build EPS momentum. Execution on these initiatives is ahead of plan in 2016, offering potential profit upside, a possible near-term catalyst. With strong free cash flow ($1B in 2016E), its capital deployment efforts prioritize value-added M&A, which we view as poorly understood, as well as share buybacks, deleveraging, and an ongoing commitment to dividend hikes. Valuation Compelling—An Attractive Alternative HC Investment: With its shares down 25% (-10% S&P 500) from a high in June, they currently trade at 16.7x our 2017 EPS, well below its peer group (25.2x). Our $58 TP is based on a P/E multiple of 23.0x, which better reflects its accelerating growth prospects, operational and capital deployment opportunities, and its competitive positioning as a diversified, established leader in animal health for which there are inherent advantages. We view ZTS as an attractive alternative health care investment, sheltered from onerous reimbursement and regulatory challenges, R&D inefficiencies, and other issues overhanging human health care. Risks to our call include weather, FX, epidemiological, or macro headwinds as well as activist involvement. Share price performance On 02-Feb-2016 the S&P 500 INDEX closed at 1903.03 Daily Feb03, 2015 - Feb02, 2016, 02/03/15 = US$43.5 Quarterly EPS Q1 Q2 Q3 Q4 2014A 0.38 0.38 0.41 0.40 2015E 0.41 0.43 0.50 0.39 2016E 0.42 0.45 0.50 0.41 Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E EPS (CS adj.) (US$) 1.57 1.74 1.78 2.28 Prev. EPS (US$) P/E (x) 26.6 24.0 23.4 18.3 P/E rel. (%) 163.7 147.6 152.9 135.1 Revenue (US$ m) 4,785.0 4,727.5 4,817.3 5,114.2 EBITDA (US$ m) 1,329.0 1,484.5 1,603.6 1,892.7 OCFPS (US$) 2.65 2.96 3.21 3.81 P/OCF (x) 16.3 14.1 13.0 10.9 EV/EBITDA (current) 17.9 16.0 14.6 11.9 Net debt (US$ m) 3,054 3,034 2,602 1,706 ROIC (%) 20.89 22.22 25.57 41.63 Number of shares (m) 497.92 IC (current, US$ m) 4,153.00 Net debt (Next Qtr., US$ m) - EV/IC (x) - Net debt/tot eq (Next Qtr.,%) - Dividend (current, US$) - Source: Company data, Thomson Reuters, Credit Suisse estimates
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
3 February 2016 Americas/United States
Equity Research Animal Health
Zoetis (ZTS) Rating OUTPERFORM Price (02-Feb-16,US$) 41.72 Target price (US$) 58.00 52-week price range 55.38 - 39.65 Market cap (US$ m) 20,773.24 Enterprise value (US$ m) 23,807.24 *Stock ratings are relative to the coverage universe in each
Leader of the Pack: Top Pick in Animal Health We Are Initiating Coverage of Zoetis with an Outperform Rating and
$58 TP: As the global leader in therapeutics for livestock and companion animals, ZTS is highly levered to rebounding industry fundamentals, and earnings growth should accelerate over an improving cost and capital structure. Our focus is on underappreciated efficiency initiatives that should drive over 900 bps operating margin expansion by 2017, a considerable feat for a company of its size that ensures double-digit EPS growth in 2017 and beyond.
Constructive on Fundamentals, Cost Structure: While restructuring will curtail NT growth, rebounding demand, as supported by proprietary survey work, should drive consistent revenue growth of 5-7%. New products and services, a business mix increasingly skewed toward faster-growing geographies and species, and efforts to optimize operations as an independent company should fuel revenue growth ahead of the industry and build EPS momentum. Execution on these initiatives is ahead of plan in 2016, offering potential profit upside, a possible near-term catalyst. With strong free cash flow ($1B in 2016E), its capital deployment efforts prioritize value-added M&A, which we view as poorly understood, as well as share buybacks, deleveraging, and an ongoing commitment to dividend hikes.
Valuation Compelling—An Attractive Alternative HC Investment: With its shares down 25% (-10% S&P 500) from a high in June, they currently trade at 16.7x our 2017 EPS, well below its peer group (25.2x). Our $58 TP is based on a P/E multiple of 23.0x, which better reflects its accelerating growth prospects, operational and capital deployment opportunities, and its competitive positioning as a diversified, established leader in animal health for which there are inherent advantages. We view ZTS as an attractive alternative health care investment, sheltered from onerous reimbursement and regulatory challenges, R&D inefficiencies, and other issues overhanging human health care. Risks to our call include weather, FX, epidemiological, or macro headwinds as well as activist involvement.
Share price performance
On 02-Feb-2016 the S&P 500 INDEX closed at 1903.03
Number of shares (m) 497.92 IC (current, US$ m) 4,153.00 Net debt (Next Qtr., US$ m) - EV/IC (x) - Net debt/tot eq (Next Qtr.,%) - Dividend (current, US$) - Source: Company data, Thomson Reuters, Credit Suisse estimates
3 February 2016
Zoetis (ZTS) 2
Zoetis (ZTS)
Price (02 Feb 2016): US$41.72; Rating: OUTPERFORM; Target Price: US$58
New operational efficiency initiatives announced in April 2015 should drive over 900 bps
operating margin expansion by 2017, despite lower revenues as it rationalizes certain
regional operations (i.e., Venezuela) and unprofitable product lines. It is essentially
eliminating $300 million in costs while preserving much of its core strengths in sales force
presence and diversity by product line, species, and therapeutic class. Importantly, the
initiatives do not signal a shift away from higher-growth, more profitable product lines, and
there should be no meaningful change in its sales force positioning.
Yes, 76%
No, 24%
3 February 2016
Zoetis (ZTS) 14
The vast majority (>95%) of its pro forma 2017 sales are still expected to be derived from
geographies where it has a direct sales presence (vs. 97% previously), despite downsizing
the number of direct countries to 45 (from 70). Its proposed rationalization of ~5,000 SKUs
will only have a nominal impact of its total number of product lines, as it will target
low-growth, low-margin doses and formulations in relevant markets. All in, ZTS is targeting
34% adjusted operating margin in 2017 (from 25% in 2014), an impressive ramp in our
view. These initiatives are also incremental to its Supply Network Strategy announced in
November 2014 that calls for a 200-bps gross margin improvement by 2020.
Execution Progress
ZTS has closed/sold five of its targeted seven manufacturing facility closures quicker than
expected, driving potential profit upside in the near term. Importantly, internal expectations
assumed it would merely shut down these targeted facilities, but it was able to sell some of
the assets, generating an incremental $82 million in cash YTD. While we expect no
material financial impact from the transaction, it offers evidence it is executing on its
restructuring initiatives already embedded in our expectations.
■ On December 19, Huvepharma, a European-based animal health company, purchased
manufacturing sites and certain associated product lines for $40 million in cash. ZTS
will divest two US manufacturing sites in Laurinburg, North Carolina and Longmont,
Colorado as well as transfer the lease of a manufacturing and distribution facility in Van
Buren, Arkansas to Huvepharma. Pursuant to the agreement, ZTS will also divest
certain product lines, primarily U.S. and international livestock products including
medicinal feed additives and water-soluble therapeutics and nutritionals, representing
an undisclosed portion of its previously targeted $280 million in expected SKU
rationalization.
■ On January 5, ZTS sold a manufacturing site in Haridwar, India to Zydus Cadila for $29
million. The deal included certain product lines that were manufactured at the site,
including lower-margin medicinal feed additives, antibiotics, parasiticides, and
nutritionals sold primarily to livestock producers in India. The sale, which will close in
1Q16, coincides with a slower-than-expected consolidation of dairy operations across
India as the country focuses more on poultry.
■ On January 14, ZTS announced its pending divestiture of a manufacturing facility in
Hsinchu, Taiwan. Pursuant to the transaction, 55% ownership of the site was sold to
Yung Shin Pharmaceutical Industrial, a local animal health company, for $13 million in
cash (estimated close is in 2Q16).
Cost Structure Initiatives
- Eliminating 5,000 SKU's (from 13,000 currently)
- Consolidating 10 manufacturing facilities
- Eliminating 2,000-2,500 employees, but will maintain leading field sales force
position
- Change some of its direct/indirect selling approach (ie. Vaccines move to
distributors)
- Streamlining corporate functions, managements
- Aforementioned initatives are incremental to its Supply Network Strategy that
calls for 200 bps gross margin expansion by 2020
Upside should stem from better underlying business mix and product
launches, not fully reflected in its long-term growth profile or guidance
3 February 2016
Zoetis (ZTS) 15
Figure 17: Operating Margin 2014-19E
Source: Company reports, Credit Suisse estimates.
Targeting Higher-Growth Geographies
While ZTS is exiting certain underperforming markets, such as Venezuela, it is also
targeting certain high-growth markets, where, as it relates to its production animal
businesses, rising populations and standards of living are driving demand for animal
protein, while higher disposable incomes are leading to rising companion pet ownership
and improving standards of pet care. Of note, in 3Q15, growth across Brazil (+12%) and
China (+24%) accelerated, despite perceived tougher macroeconomic conditions across
the regions, highlighting the inherent benefits and unique advantages of the animal health
industry, which is less tied to broader economic fluctuations.
For example, in China, the consolidation of livestock, notably swine, operations across the
country has helped drive demand for more sophisticated therapeutics. Of note, in 2015, it
established new manufacturing and R&D facilities in China, underscoring its commitment
to the country and positioning it for incremental growth despite slowing GDP in the country.
25%
28%
31%
34%36%
37%
15%
20%
25%
30%
35%
40%
2014 2015E 2016E 2017E 2018E 2019E
3 February 2016
Zoetis (ZTS) 16
Figure 18: Diversified Drivers Across Geographies, Less Tied to Broader Macroeconomic Trends
Source: Credit Suisse.
3 F
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ry 2
016
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etis
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17
Figure 19: Global Drivers—Food Security Imperative, Global Dynamics Driving Demand for Animal Health Therapeutics
Source: Company data, Credit Suisse.
Undernutrition. The obesity epidemic
in the U.S. highlights the challenge of “food deserts” in many major cities as
well as rural areas. In a food desert, wholesome, nutritious food isn’t
available as readily as cheap, unhealthy food. (1) Making "better" calories more
affordable is essential to shifting the obesity trend.
Production
Disruptions.Avian influenza
swept Mexico’s eggindustry in 2012,
wiping out 1 in 6birds, doubling egg
prices and sparkinga national crisis. (14)
Natural resources. While
slowing, deforestationto meet food needs is
a significant concernfor long-term climate
change impact on foodproduction. (13)
Gov ernment change.
The lack of affordablebread in Egypt has, in
part, contributed todiscontent with
multiple regimes in thecountry. (12)
Changing Practices.
Fewer farmers are switchingto organic production, with
some even reverting to moreinnovative production. (2)
“You have seen a slowdownin the transition of acres,”
said George Siemon, chiefexecutive of Organic Valley,
the largest U.S. organiccooperative.
Power of Protein. The
school lunch programguidelines limiting
protein in meals at U.S.schools were reversed in
December 2013 afterparticipation dropped
because kids weren’tgetting enough protein. (3)
Rising Prices.
Egg prices in the EUskyrocketed in January
2012, when a ban onconventional chicken
cages pushed many eggproducers out of business
– egg prices in the U.K.quadrupled rapidly. (4,5) Food Shortages.
In 2013, Dutchconsumers protested a
baby formula shortagesparked by local
hoarding and il legaltrade to meet exploding
Chinese demand. (6)
Civ il Unrest. Riots
broke out in 30countries to protest
high food prices in2008, and again in
2011. (7)
Rev erse Trade. Instead of simply exporting
food from an area of production to an area ofneed, growing global economies in Asia and Latin
America are buying in to markets to protect theirlong-term food security, from land purchases in
Africa to the purchase of the largest U.S. porkproducer by a Chinese company. (8,9)
Food Security /Global
Stability. High food pricesare an ongoing threat to
civil order, warn analysts atthe New England Complex
Systems Institute, whostudied the link between food
riots and the Arab Spring.As demand climbs, so could
prices and volatility. (10)
Food Crisis Looms.
According to the WorldFood Programme, 1 in 4
people living in rural areasin Zimbabwe are expected
to need food assistance inearly 2014, the highest
since 2009. (11)
3 February 2016
Zoetis (ZTS) 18
1) WSB-TV. “Experts: ‘Food deserts’ linked to childhood obesity” July 17, 2013 2) Dimitri, Carolyn; Oberholtzer, Lydia. “Marketing U.S. Organic Foods: Recent Trends from Farms to Consumers.” United States Department of Agriculture (USDA) Economic Research Service (ERS). Economic Information Bulletin Number 58. September 2009. 3) National Public Radio “Let them eat sandwiches: USDA Eases School Lunch Restrictions” Jan. 3, 2014 4) Doward, Jamie. “Supermarkets fear egg shortage as farms close over welfare rules.” The Observer. 3 March 2012. Accessed September 23, 2013. 5) Far-center. “Un oeuf is not enough: France suffers major egg shortage.” March 2012. Accessed September 23, 2013 6) British Broadcasting Corporation (BBC). “Dutch order probe into baby milk sales to China.” May 2013. Accessed September 23, 2013 7) Lagi, Marco; Bertrand, Karla Z.; Bar-Yam, Yaneer. “The Food Crises and Political Instability in North Africa and the Middle East.” New England Complex Systems Institute. Cambridge, MA. September 2011. 8) The New York Times. “Needing Pork, China Is to Buy a U.S. Supplier.” May 29, 2013 9) Gulf News. “Land-grab phenomenon threatens Africa” Dec. 29, 2013. 10) Kharas, Homi. “The Emerging Middle Class in Developing Countries.” Global Development Outlook. OECD Development Center. Working Paper No. 285. January 2010. 11) All Africa. “Zimbabwe: Nation Faces Hunger As UN Cuts Food Aid” Jan. 15, 2014 12) The Wall Street Journal. “What Egypt Wants: Cheaper Bread.” Sept. 18, 2013 13) Kirby, Alex. “Cutting Down Amazon for Agriculture Could Cut Yields.” Scientific American. May 2013Source: Credit Suisse, 2014 AH Reported Sales (Including Non-AH Sales)
Enhanced Ancillary Service Offerings
ZTS's complementary businesses such as diagnostics, genetics, medical devices, and
services (including dairy data management, e-learning, and professional consulting) focus
on an outcomes-based approach to animal health that will be an increasingly important
growth driver. ZTS can enhance the appeal of its core offerings, leverage its
industry-leading sales force, and build customer loyalty with these capabilities, helping it to
capture incremental market share.
For example, in diagnostics, more recently, ZTS launched a new consumable rapid test for
feline viral diseases, taking advantage of recent disruptions among supply chain
constituents as diagnostics industry leader IDEXX Laboratories moved to a direct
distribution model. More broadly, ZTS can leverage its dominant presence into the single
veterinary call point as well as its distributor relationships to theoretically cross sell multiple
diagnostic capabilities, among other products and services, a unique competitive
advantage.
Figure 20: Targeted Areas of Product Development
Source: Credit Suisse.
Capital Deployment Kicker: M&A and Partnerships to
Supplement Growth
On building EPS momentum, we expect ZTS's cash reserves to grow. Its capital
deployment strategy should focus on M&A, deleveraging, and share repurchases while
remaining committed to its dividend.
Acquisitions should help ZTS fortify its existing product portfolio and development pipeline
and further build its presence in new geographies and complementary products and
services that enhance its core product offering. The company has stated interest in areas
such as devices, diagnostics, genomics, pet biotech, aquaculture, and food safety. Pipeline
deals, joint ventures, and research collaborations and partnerships may also provide it with
access to new compounds and help it develop relationships with local governments and
academia, among other unconventional sources. Overall, ZTS can enhance the appeal of
its core portfolio and build customer loyalties with these complementary offerings and
Cross Species Companion Animal LivestockComplementary
Source: Credit Suisse, OECD and FAO State World Fisheries and Acquaculture 2012; *Total fishery production = capture + acquaculture. Beef and pork on dressed-weight basis; poultry and fish on an eviscerated basis.
PHARMAQ bolsters ZTS’s presence in the aquaculture market, worth $400 million in
2014, growing at a healthy clip (7-8% annually), compared with the broader livestock
(+6%) and companion animal industries (5%), according to Vetnosis. Farmed fish
currently represents 50% of overall fish consumption, compared with just 15% in 1990.
The deal adds key product lines such as AlphaJect (a vaccine), AlphaMax (parasiticide
for sea lice in Salmon), and diagnostic capabilities, among other products and
services. While profitability (24.8% adjusted EBITDA margin) tracks below ZTS, based
on 2014 statements, synergies could stem from leveraging ZTS’s global sales
presence, expediting geographic expansion initiatives, as well as optimizing R&D and
manufacturing, although we note cost cutting was not the impetus for the transaction.
According to specialty industry publication, IntraFish, Pharmaq is targeting rapid
expansion in key Asian markets, including China, Indonesia, Malaysia, and Vietnam.
Aquaculture is the fastest-growing segment, with production expanding from ~1 million
tons in the early 1950s to over 50 million tons today. Assessing the competitive
landscape, there are relatively few competitors participating in the famed fish market,
with PHARMAQ and Merck Animal Health as the largest, followed by smaller players
3 February 2016
Zoetis (ZTS) 20
such as Phibro Animal Health, Eli Lilly (Novartis), and Virbac. However, PHARMAQ
has a unique focus on vaccines.
New Potential Non-Antibiotic Solutions: On January 18, ZTS entered a partnership
with Australian-based Anatara Lifesciences obtaining the option to license its Detach
swine product globally, a naturally derived product extracted from pineapple stems for
use as an anti-infective and growth promotion agent in pigs.
Figure 22: Global Fish Production—The Fastest-Growing Species Segment in
Animal Health (Acquaculture vs. Capture, % Share of Acquaculture Rising)
MM Tons %
Source: OECD and FAO State World Fisheries and Acquaculture 2014, Credit Suisse.
3 February 2016
Zoetis (ZTS) 21
Earnings Outlook & Financial Resources In 2015, we forecast revenues to decline 1.2% to $4.7 billion, reflecting its exit from
Venezuela, ongoing SKU rationalization, and significant FX headwinds (-8.6%). More
specifically, we forecast U.S. operational growth (excl. FX) of 11% and international of 3%,
helped by rising underlying demand, particularly in the U.S., and recent acquisitions
(Abbott and PHARMAQ). More importantly, however, the EBITDA margin should expand
significantly by 363 bps as its first year of major restructuring initiatives (announced in May
2015) and Abbott synergies materialize. All in, 2015 EPS should grow 11% to $1.74,
despite the aforementioned SKU and country rationalization and foreign currency
We view 2016 as less reflective of its longer-term revenue growth and EPS prospects, and
we look to 2017 and 2018 as more relevant guides. Our 2016 EPS estimate of $1.78
(+2.2%) reflects the bulk of its restructuring initiatives as well as a negative impact from a
recent unfavorable tax ruling in Belgium (-$0.13). We forecast only 1.9% topline growth
with contributions from PHARMAQ and new products such as Simparica offset by
incremental FX headwinds and restructuring initiatives, including the elimination of ~5,000
SKUs. EBITDA margin expansion of 189 bps reflects a more profitable product mix through
efficiency initiatives and acquisition synergies.
More importantly, in 2017, we forecast more normalized topline growth of 6% with
increased exposure to faster-growing segments offsetting ongoing restructuring and
EBITDA margin expansion of 372 bps as efficiency initiatives begin to take hold. Net/net,
we estimate 2017 EPS to rise to $2.28 (+28%).
From a financial resources perspective, ZTS has $592 million in cash reserves and $4.5 billion in debt. We estimate ZTS will generate $432 million in cash flow from operations in 2015, which is tempered by meaningful one-time startup charges related to the Pfizer spin that will not recur.
Its trailing-12-month cash conversion cycle currently stands at 62 days, which compares with a rage of only 46-62 days for veterinary distributors in the U.S. that normally bear the working capital risk in the supply chain. High inventory balances are the culprit at 306 days outstanding, and while some of this may be more structural in nature given its exposure to the livestock industry, ongoing SKU rationalization could help to address the issue. More specifically, it could see inventory days in the 210-240 day territory on improvements in manufacturing, supply chain operations, and technological advances. In addition, with a smaller manufacturing footprint through restructuring initiatives, we would expect capital expenditures to decline to the benefit of free cash flow. All told, our free cash flow forecasts ramp significantly to $895 million in 2016, more than enough to finance its global growth aspirations while leaving ample cash for acquisitions, partnerships, deleveraging, share repurchases, and a dividend.
Companies Mentioned (Price as of 02-Feb-2016) ABAXIS (ABAX.OQ, $43.13) Aratana Therapeutics (PETX.OQ, $3.2) Bayer (BAYGn.DE, €100.35) Eli Lilly & Co. (LLY.N, $76.3) Henry Schein Inc. (HSIC.OQ, $150.86) IDEXX Laboratories (IDXX.OQ, $71.44) Kindred Bio (KIN.OQ, $3.4) Merck & Co., Inc. (MRK.N, $50.41) Neogen (NEOG.OQ, $52.4) Parnell Pharma (PARN.OQ, $2.5) Perrigo Company plc (PRGO.N, $144.01) PetMed Express (PETS.OQ, $17.66) Phibro Animal Health (PAHC.OQ, $33.54) Sanofi (SASY.PA, €75.27) The Patterson Companies (PDCO.OQ, $42.79) VCA (WOOF.OQ, $49.9) Vetoquinol (VETO.PA, €36.22) Virbac FR (VIRB.PA, €165.75) Zoetis (ZTS.N, $41.72, OUTPERFORM, TP $58.0)
Disclosure Appendix
Important Global Disclosures I, Erin Wilson, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Zoetis (ZTS.N)
ZTS.N Closing Price Target Price
Date (US$) (US$) Rating
20-Mar-13 33.51 36.00 N *
22-May-13 33.55 NR
23-May-13 32.84 R
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
N O T RA T ED
REST RICT ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2 nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may b e assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
3 February 2016
Zoetis (ZTS) 34
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 56% (36% banking clients) Neutral/Hold* 31% (29% banking clients) Underperform/Sell* 12% (42% banking clients) Restricted 1% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Zoetis (ZTS.N)
Method: Our ZTS $58/share TP and Outperform rating is based on 2017E P/E and EV/EBITDA multiples of 23.2x and 16.0x, respectively, which is more aligned with its peer group of animal health products companies and reflects optimism regarding its profit margin profile, as it separates from Pfizer. Given its underlying revenue growth profile, profit margin opportunity, and its long term ROIC potential, we view our Outperform rating as justified.
Risk: Downside risks to our $58/share TP and Outperform rating include slower revenue or earnings growth from weather-related, epidemiological, FX, or macroeconomic headwinds, execution risk to cost and capital structure initiatives, as well as activist involvement.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
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