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.
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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