Rational Investing - Cameron Stewart, CFA 对 $ZTS 的判断变化

Thought we'd do a nice late night edition go through a cash flow one pager on this stock Zoetis. Uh it's a veterary stock. They make drugs for the vets use and uh the stock has been absolutely hammered recently. Uh Michael Bur's taken a position. I thought I'd go through it.

if anyone ever heard out there of the stock Zoetas before, I did a video a long time ago about this company. I liked it then and stocks been absolutely crushed recently.

Look at this um stock market drop. I'll just go last last year if you will. So $160 down to 180, excuse me, down to 80. If you zoom out, it's done nothing but go down for the last two years um despite revenue and earnings increasing. So I think I think this is classic market multiple compression.

If you uh if you read some of the headlines, they had a they had one quarter where US revenue declined just US, they're global company, but US revenue declined 11%. For a particular drug uh and that has caused an absolute uh meltdown in the stock recently.

But I think other people have been maybe worried about either expiration of drugs that they had kind of effective monopolies on uh and or increased competition uh that's coming to the market. So as a result the the [clears throat] market multiple has absolutely come down. It's now sub 10x for stock that was 30 sometimes 40 times earnings or uh ibida

Return on invested capital 24%. Return on common equity almost 70%.

Uh free cash flow yield fantastic number. This is actually you know actual hard money jack that these guys are making. Divide by market cap you get 7% free cash flow yield and a debt to ibida ratio here of 1.7.

Uh that is a very unlevered company that sells drugs uh and is growing albeit um this last uh individual drug. The the revenue itself continues to grow. You can see this long track record here. Then the blue line is long-term revenue growth over the last decade. Purple is uh ebida growth. Even if we are looking to the to the most recent quarters, uh the most recent quarters were still positive uh Q over Q. It's really interesting.

Revenue. Look at this revenue for the last decade. So, u, in 2016, they were doing 4.88 billion of revenue. And that has grown to, I just run through these numbers quickly, 5.3 billion, 8.5, sorry, 5.8 billion, 6.2, 6.7, 7.7. That's a$1 billion jump in a year. Great for them. Um 8 billion 8.5 9.2 9.5. Um so on an annualized basis of Kagger uh compound annual growth rate over the last decade they're running 8%.

Now that's slightly higher than the uh industry the veterary medical industry. If you pull up um Zoet's information IR sorry the beer is making burp. I apolog That's that's not that's not good. But it is delicious. Um, if you look at the long-term growth rate of the industry, it's like 5 to 8%. These guys are growing at the top end of that range. That to me means like they're kind of an A player, right? You're they're setting the standard for the range that the industry can grow at. Love to see that.

EBITDA. So, they've been profitable every single year. Excellent. And it looks like EBITDA has grown every single year as well as revenue. So 1.7 1.7 billion. What margin is that? If I take 1.7 divide by revenue, uh that's 35% margin, right? So they're making 35% on their money.

They're making 35% margin and that's grown over the years to 43%. So, so 43% of every single dollar of revenue that they make is falling to profitability. That Ebidot turns into free cash flow after ca after um taxes and well, they don't really have any interest. So, it turns into free cash flow. That cash flow is used to buy back stock, pay dividends. We'll show you that in a little bit. So, this is great. Uh profitability is growing faster than revenue.

Now, one could argue that 43%'s probably the top end of that range. I don't know. Can they get to 44, 45? I don't know. Like, it could it could moderate and ebid growth could slow with this pressure from competition. Maybe they lower their pricing a little bit. Maybe they take take a little off the top. That that growth could slow, but historically, they've been able to do it. And they have a pipeline full of drugs that's going to continue to to come out. So, that's great.

debt. We covered debt has grown at 8% in line with revenue. Uh excess cash, they have more than this cash on the balance sheet. I'm kind of plugging what I think they could easily dividend dividend out and it not bother the company at all. U I'm still holding a billion in pure cash on top of these numbers. So if they dividend out 1.3 billion, they still have plenty of liquidity.

market cap. Uh, add all that up, you get market cap, excuse me, add all that up, you get enterprise value. Interesting. Look at the market cap collapse here at a peak of $116 billion. So, in 2021, people were paying $116 billion in market cap for this business. You can pick it up right now for 55 billion if not actually a little less. Yeah, that's at $125 uh market cap. I think it's $78 a share right now. Times 444. You can That's crazy. You can pick this up for 34 billion right now. So this new number here is now 34 billion. 30 34 billion. So what was once 116 and people rationalized that when they bought it, someone did math. They're like, "Oh, you know, I think this works." you can now buy the same stock for $34 billion. That's I think that's called d-risking.

It's kind of what what I look at and and look at the market multiple. So if we if we take enterprise value divide by this stock is is is ne at least measured on an annual basis at December. It's never been any cheaper.

Let's take a look at Finnbox. they've got a little bit better um they measure a little bit more frequently but we're seeing the same thing. So here's 10year blue line here is the EVA. So you're in your 20s you go up you up peak at 30 and you come down and you crater off to the end here at 15 times is is the low end.

Um, so we're seeing we're seeing the same same pattern here. And you you can pick this stock stock up for a price on an earnings basis based on historical earnings, right? Stocks are stock prices reflect future projections. So the market's saying, "Hey, earnings are going to be lower." So they're lowering the stock. I grant you that. They could be wrong. They could have overshot. So you can currently pick it up for the cheapest it's ever been in a decade.

their cash flow here, again, positive every year and growing at 17%. That's in line with the EBITDA. So they're both the income statement and the cash flow is is growing relatively at the same rate. That to me says at least a smell check it's been um it's been like directionally correct. The accounting team isn't playing monkey games with um you know you might see here's a great example revenue recognition.

Capex, their capex is pretty minimal, right? They're not they're not the the Googles um of the world that are having to put in a ton of cash. These are most likely research facilities upgrading technology um and so forth.

Uh debt payments. This one for me I kind of ignore because my debt ratio is less than two or less than three. Three is really what we look for. It's even less than that. So I don't if if they want to borrow a little here, a little there. I'm not going to really push that into my forecast.

Free cash flow. Um this is 4.6 billion. It's a little less than that because they borrowed money. So really, it's it's basically the net of these two, which is 2.3 billion. 2.3 billion divided by the 444 million shares outstanding is rough numbers, $5 per share of free cash flow. Uh $5 against uh a stock price of $78 is an 8 is a 6 and a half% free cash flow yield.

Um, so this business as it goes is putting off a tremendous cash. Some of what is going to be used to buy back stock, some of it's going to be a dividend, and a third of it's going to

So, let's take a look at the um Zoetas.

I think there's there's a good exec team fluff. Okay, so unmatched science and veterary expertise. Okay, 1700 R&D colleagues. Interesting. 6 billion of R&D invested. That's definitely tough to beat. Does it turn into products? It looks like it does.

They're growing topline at 8%. They're kind of setting the high-end high-end bar. And I I appreciate that. Why the stock is there's there's a couple um in the cash flow club. There's there's a couple stocks or there's a drug that has gone off um exclusivity basically. So there's a generic that's come in the market and it's taking market share and putting pricing pressure and so that's c that caused that drug's growth rate to fall last quarter and the market freaked out.

The obesity thing for animals is really interesting. I don't know if you guys been following the Ozimpic uh train that's happened, but the idea of doing kind of an ozic for animals I think is hilarious. Uh but also could be a a huge money maker.

they were saying that something like 20 or 25% of all dogs in the US are overweight which I thought was just a funny metric to track not that they should be overweight but it's a a real nuanced metric and so they're trying to go after that with with some sort of oimpic

Here they're choosing, remember this is after capex. So, what are they doing? They're buying back stock and they're paying a dividend. You can see the split here between the two. So in 2025, they're going to um generate 22.8 billion in free cash flow. They're going to pay out. They're going to do a massive share buyback program plus a dividend. That's going to chew up some of that excess cash we had on the balance sheet.

Um they're going to you know 2023 1.6 billion of free cash 1 billion in share purchase plus a dividend. Dividend was increased to 786 billion a million year-over-year. Another large share back because cash flow grew free cash flow last year a little flat uh year-over-year but they're drawing down some of their own cash to buy back more stock.

So, uh, I like I like what they're doing with their with their stock and and with their cash. And that should support growth. I mean, especially if the stock is this cheap and they have all this free cash, I would expect them to to go kind of big and and buy the stock and support it.