Zoetis (ZTS): Buy, Sell, or Hold Post Q3 Earnings?

Zoetis’s stock price has taken a beating over the past six months, shedding 28.6% of its value and falling to a new 52-week low of $116.88 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Following the pullback, is now the time to buy ZTS? Find out in our full research report, it’s free for active Edge members.

Why Does Zoetis Spark Debate?

Originally spun off from Pfizer in 2013 as the world's largest pure-play animal health company, Zoetis (NYSE:ZTS) discovers, develops, and sells medicines, vaccines, diagnostic products, and services for pets and livestock animals worldwide.

Two Positive Attributes:

1. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Zoetis has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 21.4% over the last five years, quite impressive for a healthcare business.

2. Stellar ROIC Showcases Lucrative Growth Opportunities

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Zoetis’s five-year average ROIC was 29.2%, placing it among the best healthcare companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

One Reason to be Careful:

Lackluster Revenue Growth

We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. Zoetis’s recent performance shows its demand has slowed as its annualized revenue growth of 6% over the last two years was below its five-year trend.

Final Judgment

Zoetis has huge potential even though it has some open questions. After the recent drawdown, the stock trades at 17.9× forward P/E (or $116.88 per share). Is now a good time to buy? See for yourself in our full research report, it’s free for active Edge members.

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