Morningstar | Rising Tariffs on Meat Leave Us Cautious About Zoetis' Livestock Segment; No Change to Our FVE
We’re holding steady on our fair value estimate for Zoetis at $67 per share, after making slight adjustments to our production animal projections for 2019 and 2020. While the production segment tends to grow, over the long term, along with the economy, we expect there could be some additional pressure that trickles down from rising tariffs attached to meat through the midterm. While this wasn't enough to move the needle on our valuation, we may make further revisions once Zoetis reports third-quarter results this week.Zoetis has seen several quarters of robust revenue growth in its production animal segment, with strength in swine and poultry, thanks to the increase in meat production that occurred as feed prices have fallen. We expect to see rising tariffs on pork in China and Mexico (a whopping 62% and 20% tariff, respectively) that could damp demand in the U.S. As farmers slow expansion, or at worst, begin to cull livestock (especially if feed prices rise), Zoetis would also see its swine sales come under pressure. Although swine sales only contribute 12% of Zoetis’ total revenue, if declines set in, this could modestly hurt Zoetis’ performance through the midterm.
Zoetis is a holding company. Through its subsidiaries, the company is engaged in the discovery, development, manufacture and commercialization of animal health medicines, vaccines, and diagnostic products with a focus on both livestock and companion animals. The company operates in two segments: the United States and International. The company's main product categories are vaccines, anti-infectives, parasiticides, other pharmaceutical products, dermatology products, medicated feed additives, and animal health diagnostics. The company's other non-pharmaceutical product categories include nutritionals and agribusiness, as well as products and services including biodevices, genetic tests and precision livestock farming.
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