Strong Fundamentals In The Animal Health Industry Will Drive Zoetis Shares To $200 And Beyond – Seeking Alpha
♫ Friday, December 11th, 2020Zoetis Inc. (NYSE: ZTS) is a leader in the animal health space, providing medicines, vaccines, and diagnostic products to livestock and companion animals. After following ZTS for just over a year now, the company continues to impress me with strong earnings (even during the COVID pandemic), a strong management team, and continually innovating. With all of this in mind, I am increasing my previous price target from $175 to $200 by year-end 2021. As ZTS continues to prove they are the clear leader in this space, I think the stock price will continue to react positively. With this increased price target, I am also pricing in a potential drawdown of only about 6%, where shares could trade to roughly $150.
According to the companys annual 10-K:
Zoetis Inc. is a global leader in the discovery, development, manufacture, and commercialization of animal health medicines, vaccines, and diagnostic products with a focus on both livestock and companion animals. We have a diversified business, commercializing products across eight core species: cattle, swine, poultry, fish and sheep (collectively, livestock) and dogs, cats and horses (collectively, companion animals); and within seven major product categories: vaccines, anti-infectives, parasiticides, other pharmaceutical products, dermatology, medicated feed additives, and animal health diagnostics. For more than 65 years, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them.
ZTS is a global leader in the animal healthcare space and has a proven track record when it comes to getting products to the market. With the companys extensive history, spanning roughly 65 years, the company has been able to develop market-leading products, build lasting relationships with customers, and improve the lives of animals. The company develops products for companion animals (dogs, cats, and horses) as well as livestock animals (cattle, swine, poultry, fish, and sheep). The company offers a diverse portfolio of products to each of the aforementioned groups of animals. Below is a basic breakdown of the companys offerings:
*Chart obtained from the companys most recent 10-K Statement.
The company operates in two distinct business segments, broken down by geographic region, including the United States and International. Both segments contribute almost equally to total revenue the company earns, but the US segment has a slight edge with 51% of overall revenue compared to 49% for the International segment. With over 300 different products and product lines that sell in over 100 countries, the company has an incredible presence in the global animal health market. This also ensures the company will remain relatively stable in times of economic uncertainty across various economies. To show this, the company states in their 10-K, in livestock, impacts on our revenue that may result from disease outbreaks or weather conditions in a particular market or region are often offset by increased sales in other regions from exports and other species as consumers shift to other proteins. Below is a breakdown of the companys revenue by geographic segment, species, and product category:
*All three of the above charts were obtained from the companys most recent 10-K Statement.
The various charts above show some very positive trends for the company. First, total revenue has increased an average of roughly 8% on an annual basis. With this, it is also important to note that there has not been a major increase/decrease in any of their reported segments leading to this extraordinary annual revenue growth. Also, the cattle industry has accounted for roughly 55% of total livestock revenue on an annual basis. In the companion animal industry, dogs and cats revenue has accounted for approximately 94% on an annualized basis, but the horse industry has been steadily increasing over the years as well.
In terms of revenue by product category, vaccines, and anti-infectives make up the majority of the total revenue. These two categories have accounted for 50% of total revenue in 2017, 48% in 2018, and 44% in 2019. Although decreasing, I attribute this to increased growth in categories such as parasiticides, dermatology, and animal health diagnostics. Each of these categories has seen incredible double-digit growth over the past few years. Zoetis has made a conscious effort to grow and expand their business and it is showing in this great growth on an annual basis.
Zoetis directly markets their products to veterinarians and livestock producers in roughly 45 countries across North America, Europe, Africa, Asia, Australia, and South America. The company also seeks out opportunities in emerging markets to establish a market-leading position. This is evident in markets including Brazil, China, and Mexico.
Continuing to expand and show that they are the leader in the animal healthcare space, ZTS acquired Platinum Performance in 2019, entering into the animal nutritional space. According to Inkwood Research, the global animal nutrition market was valued at $10888.81 billion in 2018 & is estimated to generate net revenue of approximately $18270.47 billion by 2027, growing at a CAGR of 5.94%. This acquisition has allowed ZTS to have access to premium nutritional product formulas and a unique approach to the field of scientific wellness for horses, dogs, and cats (10-K).
In the animal health industry, there are various potential impacts that have an effect on the livestock and companion animal medicine/vaccine segment of Zoetis business. For the livestock segment, these factors include human population growth and increasing standards of living (especially in emerging markets), demand for improved protein nutrition, increasing urbanization, and increased focus on food safety. For the companion animal market, some factors influencing growth include economic development, increasing pet ownership, improved life expectancy of companion animals, and improved technological advances in medical needs of these animals.
The overall animal healthcare market is expected to grow at a strong 5.7% CAGR [and] was valued at $38.5 billion in 2017 according to Market Research Future (MRFR). According to the APPA National Pet Owners Survey4, nearly 67% of US households (84.9 million homes) have pets. The survey also estimates the average annual cost for owners of a dog and/or cat. Below are the results:
*Numbers obtained from the APPA National Pet Owners Survey.
On average, as can be seen above, having a dog and/or cat annually can become very costly. To get an even better idea of the total cost of having a dog and/or cat, I calculated the estimated lifetime expense using a 12-year life expectancy for dogs and a 14-year life expectancy for cats. I have estimated the lifetime expense for having a dog to be between $14,000-$18,000, while the lifetime expense for having a cat to be $10,000-$14,000. Even with this statistic, people are typically always willing to spend any money necessary for their pets. Many people consider pets to be a part of the family and thus, will spend money on them just as if they were a child.
With the animal health market expected to grow to $99 billion in 2020 the growth in pet adoptions and rescues because of COVID will have a positive effect on this number. I would estimate that the number could top $100 billion easily. In a recent interview with CNBC, Kristin Peck, Zoetis CEO, was asked about the trends in the companion animal market during the COVID pandemic. She stated, we saw 20% growth in our pet care business globally and I think, like everyone else in America, there are certainly three new dogs on my block, it is driving our growth somewhat. With this trend occurring, it is important to note that it will not be a one-off thing because having a pet is a long financial commitment. Another noteworthy statement Ms. Kristin Peck made during the interview was, we think there is sustainability in the pet care numbers because as more [pets] become part of families, they will get an integral role in that family...going home to the comfort of a pet who is always happy to see you is something I dont think people will easily give up.
Since the company is very exposed to international markets, it is important to understand where the company is getting their revenues. Below is a chart depicting where the company has their revenue by country:
*Chart obtained from the companys most recent 10-K Statement.
Breaking down the above chart, it is important to note a few things. First, the U.S. is the only market to contribute more than 10% of total revenue in each of the listed years. Also, there has been a consistent increase in countries outside the U.S. contributing more than $100 million in revenue over the previous three years. In 2017, there were eight countries, 10 countries in 2018, and 11 countries in 2019. This shows that by Zoetis getting into the emerging markets early, it is greatly impacting their financial results on a YoY basis.
With products sold in more than 100 countries and direct operations in 45 countries, Zoetis is very exposed to international markets. Emerging markets accounted for roughly 22% of total revenue for the company in 2019. Because the company is able to get into these markets early, it will continue to pay off in the long term. So, although it may take a while for profits to be seen, these markets will continue to be vital to the overall success of Zoetis.
The animal healthcare industry is extremely competitive; however, Zoetis is the largest company in this space in terms of revenue. But they still face intense competition both domestically and internationally. According to the companys 10-K, principal drivers of competition vary depending on the particular region, species, product category and individual product, and include new product development, quality, price, service, and promotion to veterinary professionals, pet owners, and livestock producers. I believe Zoetis is still positioned well to maintain their position as the global leader in the space.
Given the aforementioned drivers of competition, I think the three most important drivers for Zoetis will be market region, product quality, and promotion/marketing to veterinary professionals/pet owners. With the company already being a leader in emerging markets, it will be key for them to continue to monitor international opportunities in underdeveloped countries. As countries begin to see economic growth, there will be an increase in demand for pets, due to potentially more disposable income. With this demand will come the need for animal health products, such as medicine, vaccines, medicated feeds, etc. By having a proven track record in emerging markets already, it could potentially be easier for Zoetis to break into even more countries with their products.
Product quality will remain a key driver of success in this industry and will be a major determinant of revenue for the company. If product quality lags, in terms of how successful the product is, consumers could go to competing companies that offer similar products. But, if Zoetis can continue to maintain their current quality of products, which I believe is extremely likely, they are still positioned very well to remain the main leader in this space.
Being able to maintain impressive promotion/marketing tactics will drive revenue both internationally and domestically. Being able to reach pet owners specifically, there is an emotional angle the company can take. People want the best for their pets and want them to live a long, healthy life. If Zoetis can create tasteful marking materials to promote this life for pets, it will be crucial to the continued success of their products. When marketing to veterinary professionals, it will be key to be as open and honest as possible about the products. These professionals will be willing to do business with Zoetis as long as there is honest communication about products, and they continue to be of high quality.
Some main competitors of Zoetis include Elanco Animal Health (ELAN) and IDEXX Laboratories (IDXX). Both of these companies offer similar products and, in my opinion, are the two most relatable companies to Zoetis. Zoetis is the largest of these three companies with a roughly $77 billion market cap, while IDXX follows with about $40 billion in market cap. ELAN is much smaller than both of these companies but is also the newest in terms of time in the market and IPO date of September 2018.
There is minimal competition from generic products, but it can vary from market to market. Globally, there is no generic company that competes for market share, but there are a few smaller companies that compete against Zoetis for market share in certain countries. Most of these companies specialize in a few products and do not try to break into different markets. Veterinarians are typically at the forefront of prescribing and dispensing medicine, so having a positive relationship with these professionals could be beneficial in terms of generating revenue.
The company sells its livestock products directly to livestock producers, including beef and dairy farms. They also sell directly to veterinarians, third-party distributors, and various retail outlets that offer livestock products to their customers. For their companion animal products, Zoetis sells these products to veterinarians or third- party veterinary distributors that will sell the products to consumers. In 2019, the companys two largest customers accounted for 15% and 6% respectively, while no other major customer accounted for more than 6%.
The company has sales representatives that go out to different markets to meet with customers to provide in-depth information on the products and sell them. These specialists have advanced degrees in the medical field, so they are extremely trusted globally. They are also able to provide consulting focused on disease management and training/education on diverse medical topics. By having these direct relationships with customers, Zoetis is able to have a better understanding of global wants/needs. This allows the company to be better positioned moving forward because they are able to anticipate changing market conditions.
Strengths:
Zoetis is the largest animal health company in terms of revenue, as previously stated. This can be attributed to the companys diversified portfolio of products and trusted relationships with customers. The company has an immense portfolio of roughly 300 products and sells them in over 100 countries. This allows the company to be better protected in times of poor economic conditions in various countries. If there is an economic downturn in a market, the poor performance can be offset by an increase in export/imports of other countries, as previously stated.
Having trusted customers and lasting relationships with customers is extremely important in the animal health space. The company has positive relationships with suppliers and that is able to mitigate the risk of products not getting out to market quickly. The company also has positive relationships with customers, such as veterinarians and third-party distributors, which allows their products to be well-known. Something that doesnt go noticed is how they send sales representatives and medical specialists to prospective markets to help educate people on their products and the medical industry overall. By doing this, they are breaking into international markets very well and it is showing in their revenue generated by emerging markets. This is a key strength for the company because they are actively engaging with clients and/or potential clients to help get products/knowledge to underdeveloped countries.
The final important strength the company has is that they are able to quickly identify and break into emerging markets effectively. As the global leader in the animal health space, it is vital for Zoetis to be able to consistently be able to get into new and emerging markets. By being able to get into these markets early, such as Brazil, China, and Mexico, they have been able to see a strong increase in revenue for these markets. When emerging markets do well, citizens of those countries can see an increase in disposable income, increasing standards of living, and increased demand for improved nutrition (animal protein).
The company also has impressive growth strategies in place to continue growing their business. First, Zoetis seeks to enhance [the] customer experience (10-K) by providing a personalized experience to customers so they have the best opportunities and knowledge to care for animals. This is specifically seen in the companys commitment to sending employees out into the field for consulting and education purposes. The company has also acknowledged the importance of digital and data analytics as a growing part of the healthcare industry. Zoetis has been actively investing in digital technology to complement their portfolio of products to help better care for animals.
Weaknesses:
One weakness I noticed when evaluating the company was that they have lost a small amount of market share due to an increase in smaller, more niche companies. To counter this, Zoetis will need to develop stronger communication between the executive team, employees on the ground, and market participants to better anticipate the demands of the overall market. By already having their employees on the ground and actively speaking with customers, it is vital for them to understand the smaller, more niche market, as well as the broad industry overall. As they remain the overall leader in the animal health space, it would be nice to see them take back some market share from some of the smaller, more niche companies. Since they havent it tells me that they have either gotten too comfortable with their position in the market, or they do not see the need to develop niche products. Either way, they are losing out on an important market that could add immense value to their business.
Opportunities:
A big opportunity for Zoetis will be further enhancing and developing their online platform. Companion animal customers are having the ability to bypass veterinarians and seek medication for their pets by themselves in certain markets, the U.S. included. Zoetis has an online platform for this, but growing this business will be important, especially during a time when people are increasingly less likely to leave their homes. For their current platform, third parties host and support the platform, so they are essentially paying a company to have their online platform. Given the size of Zoetis, I think it is definitely reasonable for them to find the talent and skillset of people to keep this an in-house job. This will save them money and will allow them to have full access/control over their platform.
Once the COVID pandemic begins to slow, it will be important to see how Zoetis is able to respond. With people being able to get back to work and economies globally recovering, more people will be in the market for animal health products. Again, this will be seen increasingly across their investments in emerging markets, but also as well as well-established economies. As people begin looking for animal health products, it will be important for Zoetis to be able to reach this market.
Threats:
With an increase in overall competition, it puts downward pressure on revenue and overall sales for Zoetis. If there are similar products on the market which cost less, consumers may be more willing now, more than ever, to take that product, regardless of brand name. The COVID pandemic has had this effect on various industries, but specifically in the healthcare industry because of the potential costly expenditures people face. Another threat is that generic companies are able to imitate products and sell them for less, again, putting downward pressure on Zoetis. This has the greatest potential to have a negative effect on the company in lower-income and emerging markets.
Zoetis reports FY2020 Q3 results on November 5, 2020. The company had a very impressive quarter, with companion animal product sales up 20% and livestock animal products up 9%. This also led to an impressive 20% growth in net income. This can be attributed to the impressive results seen by parasiticides such as Simparica Trio, Revolution Plus, and ProHeart 12, as well as a growth in sales for the U.S. cattle market and Chinese Swine market. The Swine market had been hit hard due to an outbreak of African Swine Fever, which had consistent negative impacts on the companys results. As this outbreak is beginning to slow, it will become a key driver of the companys results moving forward. It will be important to recognize how the company responds in the next quarter or two to get a better idea of how well the company will be able to do in this market. The companys new products, including Simparica Trio, Revolution Plus, and ProHeart 12, saw 4% growth for Q3. This is a positive trend I believe the company will be able to maintain moving forward due to an increased need for products with more people having pets.
During the companys Q3 earnings call, Kristin Peck, CEO, stated, this year has shown once again that animal health is a steady and reliable sector, even in times of economic hardship. Around the world, there will be a consistent need for nutrition (animal protein) and companionship from animals. Especially moving out of a COVID world, more people than ever before have companion animals. These animals will need medicine, food, vaccines, etc. and people will be purchasing these products for them.
Ms. Kristin Peck later stated:
in the third quarter, we achieved an important milestone for our pipeline for pain management in pets... there's been limited innovation in this area over the last 20 years, and we're excited by the potential of monoclonal antibodies, or mAbs, to be the next breakthrough in long-term pain management.
In September, the company received positive opinions on their latest mAb, Librela, from the Committee for Veterinary Medical Products in Europe. The company is looking to have Librela on the market in the first half of 2021, which could be a major catalyst for the stock.
Preliminary FY 2021 Estimates Look Strong:
The company typically puts out in-depth fiscal year results in February annually, but there were some mentions of fundamental trends/projections on the latest Q3 earnings call. Mr. Glenn David, CFO, stated:
the long-term fundamentals of the industry remain very strong with increasing pet ownership and also animal protein consumption continuing to grow... COVID has proven that this industry remains extremely resilient and were still able to grow very rapidly and operate very profitably even during these times.
Seeing how the industry has continued to outperform during this difficult economic time has been extremely promising. This trend shows that no matter what, the animal health industry will always have some kind of demand for medicines, vaccines, food, etc. Mr. Glenn David later continued to say, there are some things were very excited about including continued growth in Trio, continued growth in our [dermatology] portfolio, and the approval of our mAb portfolio". Because of the positive outlook for 2021, although very early, I believe the company will be able to continue to have very good long-term value and outperform the overall market.
Growing Companion Animal Healthcare Market:
While the overall animal healthcare market is expected to grow at a 5.7% CAGR, as previously stated, the companion animal healthcare market is expected to grow at a 7.2% CAGR. The main reasons this industry is projected to have great growth is because there are increasing pet adoptions globally, there are more government initiatives focusing on animal health, and there is growing technological advances in the space. As more people have pets, the more likely they are to be willing to spend more money on them. Pets can be considered part of the family, such as an additional child, or the only child in many households across the world. This territory comes with accepting any responsibility to provide a quality life for that animal, just like you would a child.
The vaccine industry is a major contributor to this overall projected CAGR in the companion animal industry. According to Mordor Intelligence, diseases related to companion animals are more probable to get transmitted to the human population. The bite caused by dogs and cats develops many infections in humans... so the majority of the pet owners get the animals vaccinated regularly. Being this as it is, humans will continue to vaccinate their pets, not only to keep them safe/healthy, but to keep their family, friends, and others safe as well. Given an increase in pet adoptions, this segment of the industry will continue to be a key driver as well.
The companion animal healthcare market in the Asia-Pacific region is the fastest-growing region in the world. Zoetis is positioned nicely to be a key player in this market because they are already well-established in the region. The company obtained approval in various Asia-Pacific markets for Simparica Trio. This will be another key driver of success moving forward for the company.
Strong Management Team:
Zoetis management team has been one of the top teams, with multiple positive reviews, for years now. Ms. Kristin Peck, CEO since January 2020, has been with the company in various leadership roles since their IPO in 2013. According to Glassdoor reviews, Ms. Peck has an 81% approval rating as the companys top executive. Only roughly three months into her tenure as CEO, her 100-day plan got upended by the COVID pandemic and she, along with other members of the management team, had to quickly adjust their plans for the future. In an interview with McKinsey and Company, when discussing the COVID pandemic, she stated, the executive leadership team had to pivot... 80-90% of my time was centered on protecting our colleagues and customers. This pandemic was detrimental to various companies, and CEOs/executive teams had to find a way to manage. This is no light task, especially for a CEO who has only been in their role for roughly three months.
In the midst of the pandemic, Zoetis was in the middle of their largest product launch to date with Simparica Trio. Ms. Peck stated, All of our R&D programs remained on track through this. It took a lot of creativity to keep testing sites and laboratories open, to find virtual ways of launching a new product to customers across the U.S. through webinars, and to engage with customers and pet owners. It definitely required some reallocation of resources. Ms. Peck didnt allow the COVID pandemic to impact the business too much and it shows in her commitment to customer safety and having a massive new product rollout during this time. This is exactly the kind of leadership that will continue to drive the company in the right direction and will allow the company to remain a leader in the space.
As the pandemic was beginning to slow and people were able to return to work, it was another challenge in itself to make sure customers and colleagues were still going to be able to remain safe. I believe a lot of our success was from empowering local leaders to make the decisions they needed to, stated Ms. Peck. The executive team realized that every environment was different and that they would need various plans in place to ensure the safety of everyone. In manufacturing sites, they had access to full PPE, so it was more of how to keep the people in the sites in smaller groups and deciding how to stagger shifts efficiently and effectively. On the companion animal side, it was much harder because there is much more human interaction, and they are typically in smaller environments. Instead of making the decisions for a companywide policy, the executive team determined it was best to give the local leaders the ability to make the decisions they thought was best for their area.
Finally, during this time, Ms. Peck has begun having more of an open dialogue with colleagues, wanting them to feel heard and supported during this time. The executive team sent out various surveys trying to determine what colleagues thought they were doing well and not-so-well during the pandemic. The executive team then tried to implement as much of what they could into becoming better. Building on this, Ms. Peck has begun weekly communication with colleagues even saying she has felt the need to overcommunicate and find channels to talk to people on or do virtual market visits. I think this will be key even moving out of the pandemic. Having an open dialogue with various colleagues across various markets will allow the executive team to remain on top of everything going on with their team.
To correctly value ZTS, I have built and developed various financial models. First, I wanted to build a basic comps analysis model to get an idea of how ZTS was trading relative to their biggest competitors. I chose to use ELAN and IDXX as comparisons to ZTS. Next, I analyze various trading/pricing metrics, such as EPS, ROE, ROA, P/E, Payout Ratio, and Dividend Yield. I analyze these metrics over a 3-year period to get an idea of relative trends in their financials. After determining how the company is priced relative to competitors, I build a full-projection model. For this model, I project out each line item the company lists on their financial statements over the next 5-years. This allows me to have a better idea of the companys financials moving forward. By doing this, I am able to build my Basic Assumptions model and full-DCF model. Both of these models lead to an estimated share price and a bull/bear case. Below is a breakdown of my various models.
As previously stated, for my comps analysis, I wanted to compare ZTS to ELAN and IDXX because each of these companies offer a similar animal health portfolio. Below is my model:
*Created by the author using data gathered from the companys respective 10-Qs.
Based on the above data, I determined ZTS is trading at a relative discount to these competitors. ZTS has the lowest EV/EBITDA of the three companies and has the lowest EV/EBIT and P/E ratio compared only to IDXX. I could only compare them to IDXX for these metrics because ELAN has negative metrics for both. I do not think the premium currently being paid for IDXX is warranted, and that a greater premium for ZTS, given their large market cap and market-leading position, is warranted. To see where ZTS could be trading, I chose to average the metrics to determine where the companies could be trading. Below are the results of that process:
*Created by the author using average data obtained from the Comps Analysis model.
The above data shows all three companies' averages in the far-left box and the metrics I chose to use to value ZTS in green. I decreased the metrics because IDXX really skewed the data to the upside and I did not that the averages were always representative of how the company should be valued. I also did not include ELAN in the averages for EV/EBIT and P/E since they were negative. Taking the implied prices with the respective metrics, I came to an intrinsic value of roughly $123, signifying about 35% upside potential from current trading levels.
When building out my ratio analysis, I am looking for trends over a three-year period. Specifically, I am analyzing EPS, ROS, ROE, ROA, P/E, Payout Ratio, and Dividend Yield. In addition, I also build a very basic credit analysis model to better understand the companys overall financial stability and estimate their overall credit rating. Below are the results of the two models:
*Created by the author using data gathered from the companys 10-K Statements.
Each of the indicators above represents a big part of the overall credit rating a company receives from S&P or Moodys. Based on the companys values I have calculated, I think the best credit rating for ZTS would be BBB, indicating the company is in a strong financial position. However, I dont like that the company is becoming very highly levered. This is seen in the Debt/Asset ratio specifically and how it is incredibly high around 73%. Some of the best ratios above, however, include ROE, ROA, and EBITDA Margin. A high ROE indicates that the company is deploying shareholder capital extremely well, while a high ROA indicates the company is very efficient at using their assets to generate profits. I think if ZTS can decrease their leverage, as they have slowly been doing throughout the past few years, they will continue to prove their stock deserves a premium.
Below is my overall Ratio Analysis model:
*Created by the author using data obtained from the companys 10-K Statement.
The company hasnt been extremely consistent over the past three years. ROE has fluctuated partly due to drastic increases in Net Income. The change in Net Income from 2017-2018 was due to 3% price growth of products, increased demand for products, the acquisition of Abaxis, and new product volume growth, as per the 2018 10-K. Although not a very strong dividend yield, I think the company can benefit from keeping it consistent right around .50%. This will allow investors to project out their dividend payments and feel comfortable about consistently receiving them. This will contribute to about a 21% payout ratio, which I think is very reasonable for the company.
For my Basic Assumptions model, I start by calculating the companys Weighted Average Cost of Capital (WACC) and determine appropriate growth trends on a per-sales basis. Next, I project out the important income statement/balance sheet items to get a better view of the company moving into the next 5-year period. After having these line items completed for a 5-year projection, I am able to build out a basic DCF and APV model to calculate an intrinsic value for the company.
Below are my models of a projected income statement/balance sheet and results of the basic DCF/APV models:
*All of the above charts were created by the author using data gathered from the companys annual 10-K Statements and calculated projections.
Based on the above information, I determined ZTS has a fair value of around $188, which signifies roughly 19% upside potential from current trading levels. However, to get an even better idea of the potential price levels of the stock, I created a sensitivity analysis to determine a true bull case and bear case estimate. Below are the results of that model:
*Created by the author using data gathered from the Basic Assumptions model.
As a bull case, meaning, if the company is able to hit all of the above metrics I have predicted, the stock could be trading at roughly $213. On the other hand, if the company falls short on a number of key metrics, the bear case estimated stock price is calculated as roughly $154. In the near term, this is a key pull-back level to watch for. Trading right around $159 now, the bear case calculation signifies only 4% downside potential as opposed to 34% upside potential with a price target of $213. I decided to use a +/- 10% forecast error in determining the bull/bear case estimates. I chose this percentage because I wanted to make sure I got enough downside risk, especially continuing in a COVID environment.
My full-projection model is very in-depth as I project out each line item for the income statement, cash flow statement, and balance sheet on a 5-year basis. By building this model, I am able to get an in-depth look at how I think the companys financials will look into the foreseeable future. As opposed to showing each statement, I will include just my projected income statement here. Below are my projections:
*Created by the author using data obtained from the companys 10-K Statement.
After building out this model, I use this data to build my full-DCF model. This is a more in-depth DCF than in my Basic Assumptions model and it is a 10-year model, rather than a 5-year model. Below are the results:
*Created by the author using data obtained from the full-projection model.
Based on the results of this model, the intrinsic value for ZTS is $227, signifying a 43% upside potential from current trading levels. Using a terminal growth rate of 2%, a decrease from my estimated 4.75% in my full-projection model, allows me to have a better margin of safety in building the model. Decreasing the terminal growth rate also allows the price to be respective of medium-term potential and doesnt let the price get too inflated. I pulled in the WACC of 6.16% from my calculations in my Basic Assumptions model.
Further emphasizing this idea, I created a sensitivity analysis based on the results of these results, determining how the price would change given an increase/decrease in terminal growth rate and WACC. Below are the results:
*Created by the author analyzing different terminal growth rates and WACCs.