Is Zoetis Inc (ZTS) Worth the Premium?

After all of the hype and hoopla over Pfizer Inc. (NYSE:PFE)‘s spinoff of Zoetis Inc (NYSE:ZTS) at the beginning of the year, Zoetis shares are basically right back where they started in 2013. There’s still plenty of interest in the animal health stock, though. Pfizer’s offer to allow its shareholders to exchange shares for Zoetis stock met with lots of takers. More than 400 million shares were swapped in an oversubscribed exchange deal.

Were these eager investors smart to swap out share of Pfizer for Zoetis Inc (NYSE:ZTS) stock? Many undoubtedly assumed that Zoetis’ growth prospects make it more attractive. But is Zoetis really worth the price?

Too expensive?
A case can be made that Zoetis Inc (NYSE:ZTS) is overpriced. The stock trades at a trailing price-to-earnings ratio of 33 and a forward multiple of almost 19. It’s not that those multiples automatically make Zoetis too expensive by themselves. After all, investors are usually more than willing to pay a premium for great growth.

However, when we look at some other health care stocks for which investors are paying more, Zoetis suffers by comparison on several fronts. For example, Biogen Idec Inc. (NASDAQ:BIIB) trades at a trailing P/E of just below 35 and a forward P/E of over 21. That’s not too far off from the levels for Zoetis.

Biogen, though, grew earnings last quarter by 41% year-over-year and increased revenue by 9.5%. Zoetis Inc (NYSE:ZTS) saw nice earnings growth, but its 26% is well below that of Biogen. The company’s adjusted net income growth of 18% was less than half of the 43% reported by Biogen. Zoetis’ revenue growth of 5% was also only around half of Biogen’s 10% top-line growth figure.

Analysts project around 15% annual earnings growth for Zoetis over the next five years and nearly 20% for Biogen. All things considered, Zoetis seems to be priced more expensively for its realized and prospective growth.

Some of the growth Zoetis that did see in the last quarter was probably only temporary. The one area that the company experienced double-digit year-over-year revenue growth was in the U.S. companion animals market. However, that growth was driven partially by a competitor’s supply issue that is now resolved.

Worth every penny?
Just looking at sheer numbers doesn’t tell the full story, though. Comparing Zoetis Inc (NYSE:ZTS) with Biogen isn’t really an apples-to-apples comparison because their markets are so different. Proponents for Zoetis would argue that the stock is deservedly priced at a premium because of its lead position in the animal health industry.