Zoetis Inc (NYSE:ZTS) to Deliver Up to 12% Earnings Growth

January 31, 2017

President Peter Tuz of Chase Investment Counsel Corporation says Zoetis Inc (NYSE:ZTS) is being driven by emerging markets as well as aquaculture, and the company should deliver 10% to 12% earnings growth over the next couple of years.

It is the world’s leading animal health company. It is a pharmaceutical company for animals. The firm has about half its business in the U.S. and the other half in the rest of world. No country other than the United States is more than 5% of the business. The second-largest market is Brazil.

In terms of what kind of animals it serves, about 60% are farm animals — cattle, swine, poultry — and included in that are fish. About 40% are pets, which basically means dogs, cats and horses…

What’s driving the company really are two main factors, an improving standard of living around the world, where people are going to be eating more and adding more protein to their diets. Emerging markets are incredibly important to this company, and as people raise more cattle, more swine, more poultry in confined spaces, this tends to increase the use of antibiotics and vaccines.

Another business they’ve entered fairly recently, but in a big way, is aquaculture, fish farming, which I think is less than 5% of their business right now, but it is one of their fastest-growing segments. When you raise fish in a very confined environment, it is important to have good infection control and products such as that because illness tends to spread very quickly.

Zoetis is classified as a health care company, but it should have probably mid- to high-single-digit revenue growth and 10% to 12% earnings growth for at least the next few years. If you looked at 2015, it had 11% earnings growth. It will probably be more like 17% in 2016, dropping down to 10% going forward. It’s a consistent growth stock, a leader in its industry with not a lot of competition, a high return on capital, a strong balance sheet, all those things that we like in a growth stock.

Peter Tuz