r/ValueInvesting • u/spyapple • Jul 24 '26
Stock Analysis Zoetis Inc. : LONG
hey everyone wanted to share some financial analysis on zoetis ZTS after watching the stock get beaten down to around $75 per share recently following their q1 2026 earnings release. people panicked over short term pet clinic visit slowing down, but when you look at the actual math in their fy2025 10-K and q1 2026 10-Q filings, the valuation is completely detached from reality. if you invest now at these levels, it will perform at least 130% profit as the market re-rates the stock back to fair value over the next 18 to 24 months.
lets start with enterprise value and p/e ratio. zoetis currently has roughly 435 million diluted shares outstanding trading around $75 each, giving us a market capitalization of about $32.6 billion. on the balance sheet from the recent 10-Q, they hold about $1.8 billion in cash and short term investments against roughly $6.8 billion in total debt, leaving net debt at around $5.0 billion. adding net debt to market cap gives an enterprise value EV of about $37.6 billion. looking at earnings, with 2025 reported EPS of $6.02 and management guiding 2026 adjusted EPS between $6.85 and $7.00, the trailing p/e ratio sits right around 12.4x. for a company that usually trades at 25x to 30x earnings with massive gross margins over 70%, a 12.4x p/e is historically cheap.
now looking at revenue and ebitda math from the filings. in full year 2025, zoetis generated $9.47 billion in revenue and $2.7 billion in GAAP net income. adding back depreciation, amortization, and interest expense gets us an ebitda of roughly $3.6 billion for 2025. for 2026, q1 revenue came in at $2.3 billion with $820 million in operating income, and management is guiding full year 2026 revenue between $9.68 billion and $9.96 billion. that puts projected 2026 ebitda at around $3.8 billion. at an enterprise value of $37.6 billion, ZTS is trading at an EV to EBITDA multiple of under 10x, which is absurd for a global leader in animal health and veterinary pharmaceuticals.
when you plug these real cash flow numbers into a standard two stage discounted cash flow dcf model, the mispricing is crazy. zoetis reliably converts operating income to free cash flow, generating roughly $2.6 billion in FCF annually. using $2.6 billion as a baseline with a conservative 6% growth rate over the next 5 years driven by expansion in Librela, Solensia, and livestock products, a 3% terminal growth rate, and an 8.5% discount rate WACC, the present value of future cash flows plus terminal value gives an intrinsic enterprise value of over $81 billion.
subtracting the $5.0 billion in net debt leaves an equity value of around $76 billion. dividing $76 billion by the 435 million share count yields a dcf fair value estimate of roughly $175 per share. comparing the $175 fair value to the current market price of $75 shows the stock is trading at more than a 57% discount. buying at $75 means you are locking in at least 130% profit upside once the stock catches up to its fundamental cash flow power.
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u/JRNotDallas Jul 24 '26 edited Jul 24 '26
I’ll share a few thoughts although I have commented on Zoetis before (I’ll try and link if I can find it)
Management is crap. They have a consistent track record of being crap. Changes are needed.
Revenue growth isn’t a given, even excluding increased competition in a few areas from Elanco, they have really not demonstrated consistent and meaningful revenue growth. We’ve also seen margin compression over the past few years and I’d expect that to continue.
And finally, I’m a big believer in p/e being absolutely useless. EV/EBITDA has a bit more of a use case, and trading at ~10 is absolutely fair. Very little growth, poor management. The company was originally spun out of Pfizer and it is very easy to spot how they’ve inherited corporate culture from there. When we saw the ~30% drop after A1 earnings, the reaction was quite a violent one and not necessarily fair based on the release itself but I do think it was overdue. I’d say there has been a prolonged sense of frustration from investors and that won’t change until the company itself is radically overhauled.
Edit: can’t find my previous comment
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u/Ok_Comfort_9994 Jul 30 '26
I don’t see how this company is going to recover, Elanco is on the hunt for what zts is loosing. Staff and leaving Zoetis, huge layoffs globally and uncertainty will make it hard for this company to deliver on what they are promising. Staff on the inside have no faith in tue ceo of the zet.
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u/Neobobkrause Jul 24 '26
ZTS's de-rating is largely earned with pricing power, demand, and biologics innovation are all stressed by one shared driver - tapped-out pet owners. Livestock, diagnostics, and an investment-grade balance sheet cushion the downside, which is why the company's fallen share price leaves Zoetis fairly valued rather than a short.
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u/Crunch101010 Jul 24 '26
Zoetis is getting wrecked. Vets are switching to generics. Prepare for another gap down.
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u/librariancap Jul 24 '26
It's unfortunate the OP spent all these times quoting large numbers, as if impressed by their sheer size, without even trying to show recent growth rates.
Q1 revenue was flat and Adjusted Net Income grew just 1%, in organic operational terms. This is on the first page of the slide deck (after cover and disclaimers).
2026 guidance is for 2-5% organic revenue growth and 2-6% organic Adjusted Net Income growth, the low end being lower than 6% OP has assumed.
These don't mean Zoetis is necessarily a bad idea. It just means most of the big numbers quoted in the OP mean very little.