$ZTS valuation model
Zoetis has everything that existing investors love in a compounder except, perhaps, a price that makes sense.
$ZTS is down over 50% from its 52-week high, cut guidance twice this year, and analysts still call it the widest moat in animal health. One of those facts is about to matter a lot more than the other.
Key assumptions:
Explicit average 5Y/5Y growth @ 2.8%/8%
Long-term growth in perpetuity @ 2.5%
EBITDA Margin 42%-44%
WACC @ 7.5%.
Adj. EBITDA exit multiple of 10
Tax rate 21% - in line with stat rate
The input that drives reinvestment is the most recent Sales to Capital ratio = 0.74, linearly regressed to the Drugs (Pharmaceutical) average rate of 0.83 in year 10
Growth profile (for context)
Zoetis’s expected revenue growth has weakened materially following its Q2 2026 guidance cut. For a ten-year DCF, I use approximately 3% annual revenue growth, with a recovery profile rather than a constant rate.
Why the forecast is now lower:
Zoetis reduced 2026 revenue guidance to $9.12–$9.32 billion, versus approximately $9.47 billion in 2025.
Q2 revenue was flat reported and down 1% organically, reflecting weaker companion-animal demand, price sensitivity, fewer veterinary visits and increasing competition.
Management historically targeted mid-to-high-single-digit growth, but that target currently looks too optimistic without a strong pipeline-led recovery.
Verdict
My intrinsic value for Zoetis is 107. Valuation suggests that the stock is trading at 29% discount to fair value. If adjusted to FV within 3 years, it will generate an annual alpha @ 12%.
Disclaimer: This post is for informational and educational purposes only. I don’t own shares in ZTS but can buy/sell them at any time after this post is published. Not financial advice. Do your own research.