Zoetis (ZTS) Stock Declines Despite Valeant Merger Talk

NEW YORK (TheStreet) -- Zoetis (ZTS) shares are down 9% to $50.43 in early market trading on Friday after the animal health medicine developer received a takeover bid from Canadian drug maker Valeant Pharmaceuticals (VRX), according to the Wall Street Journal.

Zoetis was spun off from Pfizer (PFE) in 2013 and has a current market value of approximately $25 billion.

Valeant Pharmaceuticals has been active in acquisitions in recent months and closed an $11 billion acquisition of Salix Pharmaceuticals in March.

Analysts have pegged the company as a potential takeover target since activist investor William Ackman took an 8% stake in the company last November, according to the Journal.

Valeant shares are down 1.25% to $230.29.

Insight from TheStreet research team

Zoetis was the subject of a Real Money Pro article entitled 'Weekly Bull Chart: Zoetis' in late May. Here is what analyst Timothy Collins had to say about the stock.

The stock is now above the resistance levels from a channel that trades back through November of last year. This week the expectations would be for a close over $49, which allows for a little downside, for Zoetis to remain a buy. If I were a buyer Monday, and I likely will be, then my yellow flag is $49 and my stop is $48. If we close under $49 there is a good chance we'll trade back in the channel. But given the overall market could falter I'm willing to give the stock down to $48. This still would not retrace the entire move of the last week.

 

But it isn't just about price. The technical setup for Zoetis is strong as well. The setup here is complex, but it isn't the first time that we've seen it. We have a rising RSI that bounced off the 50 midline recently, remaining in bullish territory. Furthermore, the slow stochastics just did a similar bounce and encompassed a bullish crossover along with it. Both momentum and trend are strengthening again here along with price. Then, we add in the Force Index moving back into bullish (green territory) and we can now include the price-volume relationship in our bullish thesis. But we're not done yet. Price has now broken above the upper bollinger band creating a potential breakout from a short-term volatility squeeze. Price plus volume plus momentum plus trend plus volatility equals very strong buy.

-Timothy Collins, 'Weekly Bull Chart: Zoetis', 5/31/2015 

TheStreet Ratings team rates ZOETIS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ZOETIS INC (ZTS) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, good cash flow from operations, solid stock price performance and expanding profit margins. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • ZTS's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 0.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • ZOETIS INC has improved earnings per share by 6.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ZOETIS INC increased its bottom line by earning $1.16 versus $1.01 in the prior year. This year, the market expects an improvement in earnings ($1.65 versus $1.16).
  • Net operating cash flow has significantly increased by 360.86% to $60.00 million when compared to the same quarter last year. In addition, ZOETIS INC has also vastly surpassed the industry average cash flow growth rate of -24.06%.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 53.54% over the past year, a rise that has exceeded that of the S&P 500 Index. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • The gross profit margin for ZOETIS INC is rather high; currently it is at 68.08%. Regardless of ZTS's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ZTS's net profit margin of 14.87% is significantly lower than the industry average.
  • You can view the full analysis from the report here: ZTS Ratings Report

More from Markets

Replay: Jim Cramer on Tariffs, the Market Rally, Caterpillar and Micron

Replay: Jim Cramer on Tariffs, the Market Rally, Caterpillar and Micron

Video: When Planning for Retirement, Don't Underestimate Your Life Span

Video: When Planning for Retirement, Don't Underestimate Your Life Span

Video: Here's What May Come Next for Theranos Founder and CEO Elizabeth Holmes

Video: Here's What May Come Next for Theranos Founder and CEO Elizabeth Holmes

Charlie Gasparino Says GE Is Reportedly Looking to Slash Its Dividend Again

Charlie Gasparino Says GE Is Reportedly Looking to Slash Its Dividend Again

GE Confirms $11.1 Billion Transportation Merger With Wabtec

GE Confirms $11.1 Billion Transportation Merger With Wabtec