Although spin-off situations offered investors compelling investment opportunities most of the time, investors should study each situation quite carefully to determine its own attractiveness. Recently, Pfizer Inc. (NYSE:PFE) has sold 86.1 million class A shares in its animal health unit, Zoetis Inc (NYSE:ZTS) in the form of an IPO. After the offering, Pfizer still retains around 82.8% of the economic interest in Zoetis. Let’s dig deeper to see whether or not investors should buy Zoetis at its current price.
The Largest Global Company in Animal Health
Zoetis is considered a global manufacturer of medicines and vaccines for both livestock and companion animals in around 120 countries. It has more than 300 products with two main business sectors: livestock and companion animal. The majority of its revenue, $2.77 billion, or 66%, was generated from the livestock sector while the companion animal sector generated around $1.43 billion, or 34% of the total revenue. Indeed, Zoetis is the biggest global company in the animal health medicines and vaccines business, with $4.2 billion in revenue in 2011. Merck Animal Health, the animal health division of Merck & Co., Inc. (NYSE:MRK) ranked second with $3.25 billion in revenue. In terms of geography, Zoetis generated most of its sales in the US, accounting for around 41% of the total sales. Europe/Africa/Middle East ranked second with $799 million in revenue, or 25% of the total revenue. Emerging markets including Brazil, China and India contributed around 27% of the total sales in 2011.
What interests me is the growing trends in both the top and bottom lines of Zoetis. In the past 3 years, the company has been growing its revenue quite rapidly, from $2.76 billion in 2009 to $4.23 billion in 2011 while its net income increased from -$100 million in losses in 2009 to $245 million in profit in 2011. However, the business seemed to be a bit over-leveraged. As of September 2012, the total equity was more than $1 billion while the cash on hand was $300 million and the long-term debt was nearly $3.6 billion.
But Seems to be Expensive
At the current trading price of nearly $34 per share, Zoetisis worth nearly $17 billion on the market. The market is valuing Zoetis at more than 16.3x EV/EBITDA. Pfizer, its parent, still owns 83% of Zoetis after the IPO. Pfizer is trading at $27.30 per share, with the total market cap of $200 billion. It was much valued much cheaper than Zoetis, at 8.3x EV/EBITDA. Merck, with $125.9 billion in market cap, is valued at only 7.17x EV/EBITDA. Among the three, Pfizer had the highest LTM operating margin, at 33%. Merck ranked second with a 23% operating margin while the operating margin of Zoetis was around 20%. However, as Pfizer and Merck are much bigger, more diversified and more mature than Zoetis, both of them are valued more conservatively.
Foolish Bottom Line
With a market leading position in animal health business, Zoetis can be considered to have a wide moat. It is quite hard for competitors to win over a global leader in animal health with 300 products that were sold in 120 countries. However, as Zoetisis quite pricey at its current valuation, I would rather wait for price corrections before initiating a long position in this company.
The article A Global Leader in Animal Health - Spinoff Opportunity? originally appeared on Fool.com and is written by Anh HOANG.
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