Hold Off on Buying This Animal Care Name for Now
Shares of Zoetis saw a run before the opening bell, but there's reason to remain cautious.
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Animal care is hot, or at least warm. We love our pets, but it's not just about pets. Zoetis ZTS released the firm's second quarter financial results on Tuesday morning. Those results were solid. The guidance was strong too. The stock ran some 7% early on Tuesday morning, ahead of the opening bell but shortly after the opening bell had rung its last, the stock gave up those gains and then some. Opportunity calling? Let's check this name out.
For those who don't know, Zoetis is a global company focusing on the discovery, development, manufacture and commercialization of medicines, vaccines, diagnostic products and generic tests for both companion animals and livestock. Headquartered in Parsippany, New Jersey, the firm markets itself directly across 45 different countries across six continents.
For the three-month period ended June 30, Zoetis posted an adjusted EPS of $1.76 (GAAP EPS: $1.61) on revenue of $2.46 billion. These top- and bottom-line results all beat Wall Street's expectations, while the sales print was good for year-over-year growth of 4.2%. Organic operational revenue was good for growth of 8%. For those about to ask just what "organic operational revenue" is, the firm uses this metric to reflect sales excluding the impacts of foreign exchange rates and certain acquisitions and divestitures.
Operations
As revenue grew 4.2% to $2.46 billion, the cost of those sales contracted by 3% to $649 million. This left a gross profit of $18.11 billion (+7%) as gross margin improved from 71.7% to 73.6%. After accounting for all operating expenses, interest, non-operating income and expenses and taxes, GAAP net income attributable to Zoetis shareholders printed at $718 million (+15%). This works out to $1.61 per fully-diluted share comparing well to the year ago comp of $1.37.
Segment Sales
- Companion Animals: generated revenue of $1.788 billion (+8%)
- Livestock: generated revenue of $638 million (-8%)
- Contract Manufacturing: generated revenue of $34 million (+89%)
Regional Sales
- U.S.: generated revenue of $1.356 billion (+4%)
- International: generated revenue of $1.07 billion (+3%)
Guidance
For the full year, Zoetis increased revenue projection to $9.45 billion to $9.6 billion from $9.425 billion to $9.575 billion. This also took the midpoint of the range above the $9.5 billion that Wall Street was looking for. Organic operational growth is now seen at 6.5% to 8%, narrowing the range by boosting the low end. The firm also increased its projection for full year EPS from $6.20 to $6.30 to $6.30 to $6.40. Wall Street had been down in the low $6.20s, so this was a huge beat.
As Far as I Can Tell...
The firm did not publish a statement of cash flows or a balance sheet in their press release. As far as I can tell, Zoetic has not yet filed a Form 10-Q with the SEC, which is where I would look for that information if not supplied in the press release. There are some firms that do not release this information on the same day, but those firms are few and far between.
For the first quarter, Zoetis did post their earnings and then filed their Form 10-Q on May 6, so this information still may be coming. Looking at past quarters, cash flows have been healthy and the balance sheet, while a little heavy on debt, was not a reason to worry.
Technical Concerns
This chart is problematic. What I see is an inverted head-and-shoulders pattern of bullish reversal that looks like it could be about to fail. If the shares that were higher Tuesday morning create a new low lower than what the stock experienced on Friday, I would rather not buy this dip. That would put the lows of April in play. Buy the stock if it gets there?
That could make the pattern that we are looking at appear to be a double bottom, which would be a positive, but I would not do anything in size right now or maybe not even then. Relative strength is weak and the daily MACD is now postured quite bearishly. On top of that, we don't know what's on the 10-Q. My opinion is that this is a definite "hold your fire" for now.
At the time of publication, Guilfyoyle had no positions in any securities mentioned.
