DCF Studio

    ZTS · NYQ · Healthcare

    Zoetis Inc.

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD 103.36

    Market price

    USD 71.40

    Implied upside

    +44.8%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedCapital expenditure runs at 7.4% of revenue against depreciation of 5.5%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.

    Value Per Share

    Perpetuity growth
    USD 103.36+44.8%
    Exit multiple
    USD 80.61+12.9%
    Market price
    USD 71.40

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    0bn1bn3bnFY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayUSD
    LineFY26FY27FY28FY29FY30CAGR
    RevenueUSD 10.0bnUSD 10.5bnUSD 11.1bnUSD 11.7bnUSD 12.3bn+5.4%
    EBITUSD 3.7bnUSD 3.9bnUSD 4.1bnUSD 4.3bnUSD 4.5bn+5.4%
    NOPATUSD 2.9bnUSD 3.1bnUSD 3.2bnUSD 3.4bnUSD 3.6bn+5.4%
    Add depreciation & amortisationUSD 549.3mUSD 579.1mUSD 610.5mUSD 643.6mUSD 678.5m+5.4%
    Less capital expenditureUSD -735.0mUSD -774.8mUSD -816.8mUSD -861.1mUSD -907.8m+5.4%
    Less increase in working capitalUSD -513.4mUSD -541.2mUSD -570.5mUSD -601.5mUSD -634.1m+5.4%
    Free cashflow to firmUSD 2.2bnUSD 2.3bnUSD 2.5bnUSD 2.6bnUSD 2.7bn+5.4%
    Discount factor0.96140.88870.82150.75940.7019-
    Present valueUSD 2.1bnUSD 2.1bnUSD 2.0bnUSD 2.0bnUSD 1.9bn-2.6%
    Present Value Of The ForecastUSD 10.1bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta0.818Reported 0.729, pulled toward 1.0 (Blume)
    Cost of equity9.50%Risk-free + beta x equity risk premium
    Cost of debt5.00%Floored at the risk-free rate (implied cost of debt was lower)
    Market capitalisationUSD 29.5bn76.2% of capital
    Total debtUSD 9.2bn23.8% of capital, book value as a proxy
    Tax rate20.4%Effective, capped at statutory
    WACC8.18%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD 103.36

    81% of EV

    Forecast FCFF, final year
    USD 2.7bn
    Capex at depreciation, working capital in reinvestment
    USD 3.8bn
    Less reinvestment at g/ROIC (11.3% of NOPAT)
    USD -429.1m
    Capitalised
    USD 3.4bn
    ROIC (reported)
    22.1%
    Terminal value, undiscounted
    USD 60.8bn
    Terminal value, discounted
    USD 42.7bn
    Enterprise value
    USD 52.8bn
    Less net debt
    USD 6.9bn
    Equity value
    USD 45.9bn

    Exit at 8.9x EBITDA

    Value per shareUSD 80.61

    76% of EV

    Terminal value, undiscounted
    USD 46.4bn
    Terminal value, discounted
    USD 32.6bn
    Enterprise value
    USD 42.7bn
    Less net debt
    USD 6.9bn
    Equity value
    USD 35.8bn

    Spread between methods: 25%.

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    6.18%140.35153.27169.65191.13220.56
    7.18%112.07119.91129.40141.12155.99
    8.18%92.3097.39103.36110.45119.03
    9.18%77.7281.1885.1589.7495.11
    10.18%66.5268.9771.7174.8278.37

    Outlined: this model. Green text: above today's price of 71.40. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year5.4%-3.3%-8.8pp
    EBIT margin36.7%27.0%-9.7pp
    Discount rate8.2%10.2%+2.0pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.