Why is Zoetis (ZTS) down 2.5% since its last earnings report?

A month has passed since the last earnings report of Zoetis (ZTS). Shares have lost about 2.5% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Zoetis due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the company’s most recent earnings report in order to better understand the important catalysts.

Zoetis’ second-quarter earnings and revenues beat estimates

Zoetis reported second-quarter 2020 adjusted earnings of 89 cents per share (excluding one-time items), which was lower than year-ago quarter earnings of 90 cents but beat the Zacks Consensus Estimate of 66 cents.

Total revenues were flat year over year at $1.55 billion, surpassing the Zacks Consensus Estimate of $1.36 billion.

Quarterly highlights

Zoetis reports business results in two geographic operating segments – the United States and international markets. It has a diverse portfolio of products for farm and companion animals.

Revenues in the United States segment increased 6% year-over-year to $823 million. Sales of companion animal products in the region increased 19%, primarily driven by higher Simparica franchise sales, including some initial stock of the new triple parasite treatment, Simparica Trio. The Apoquel and Cytopoint brands in the dermatology portfolio also contributed to this growth. However, sales of animal products fell 18% in the quarter. Disruptions in the food supply chain, including reduced processing capacity of producers and the continued migration of distribution channels, also contributed to the decline. The decline in the cattle portfolio was also the result of continued unfavorable market conditions for beef and dairy, while sales of pork products were negatively impacted by increased competition

International segment revenues declined 5% year-over-year (up 3% operationally) to $708 million. Livestock sales decreased by 5% in the quarter (operating increase by 4%). Notably, sales of swine products have increased as a result of increased herd production and tightened biosecurity measures following African swine fever in China. The main cause of the fish growth was the recently released antiparasitic Alpha Flux. Sales of cattle products declined in the quarter due to the impact of Covid-19 in some markets, as well as the cessation of production of non-essential products in Brazil.

Sales of companion animal products decreased 3% on a reported basis and increased 2% on an operational basis. Sales of companion animal products in China continued to grow rapidly, driven by strong market dynamics. Growth in the pet products segment was partially offset by the impact of the Covid-19 pandemic and social distancing measures in certain EU and Latin American markets, including Brazil. This resulted in reduced traffic in veterinary clinics.

2020 Guidelines

Zoetis updated its full-year 2020 guidance. The company now expects adjusted earnings per share of $3.52 to $3.68, compared to previous guidance of $3.17 to $3.42 per share.

Revenue is now forecast at $6.300 billion to $6.475 billion, up from the previous range of $5.950 billion to $6.250 billion.

The guidelines take into account exchange rates from mid-July.

Other updates

In July, the company acquired Fish Vet Group as a strategic addition to its Pharmaq business, which develops and markets fish vaccines and offers aquaculture vaccination and diagnostic services.

How have estimates changed since then?

Over the last month, investors have witnessed an upward trend in estimate revisions. As a result of these changes, the consensus estimate moved by 6.59%.

VGM results

Currently, Zoetis has a solid growth score of B, a rating with the same momentum score. Plotting a somewhat similar path, the stock received a grade of C on the value side, ranking in the middle 20% for this investment strategy.

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for the stock are trending upwards, and the scale of these revisions looks promising. Notably, Zoetis carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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