Zoetis (ZTS): Stock to Beat Earnings Estimates in Q2 Again

Zacks Equity Research Published on August 01, 2016

Zoetis Inc. (ZTS - Free Report) is scheduled to report second-quarter 2016 results on Aug 3, before the opening bell. The company has been seen to consistently beat earnings expectations. In fact, Zoetis’ earnings surpassed expectations in each of the last four quarters, with an average positive surprise of 16.37%.

In the last reported quarter, the company comfortably beat expectations with a positive earnings surprise of 17.07%. Will Zoetis be able to surpass expectations this time around as well? Let's see how things are shaping up for this quarter.

Factors Likely to Impact Q2 Results

At the time of reporting first-quarter 2016 earnings results, Zoetis narrowed or raised its 2016 guidance for a number of factors including muted impact of foreign exchange rates for the balance of the year, strong performance of the International segment (expected to continue for the rest of 2016), continued launch of Apoquel in new markets and a lower tax rate. For 2016, the company expects earnings in the range of $1.83 to $1.90 per share (old guidance: $1.71 to $1.81 per share) on revenues of $4.775–$4.875 billion (old guidance: $4.65–$4.775 billion).

Zoetis’ diversified portfolio of products for livestock and companion animals should continue to drive top-line growth at the company.

The company’s companion animal business has been performing well and is expected to drive growth in 2016 and beyond on the back of increasing sales of Apoquel, the launch of Simparica (sales are expected to ramp up in the remainder of the year), introduction of new vaccines in Europe and the U.S. in addition to products acquired from Abbott Laboratories’ (ABT - Free Report) Animal Health business (acquired in Feb 2015).

Meanwhile, performance of the livestock business in both the U.S. and International segments continues to be strong and is poised to contribute to revenue growth through the remainder of the year.

Notably, Zoetis has been able to accelerate its operational efficiency program, which should start yielding results from the second half of 2016. It anticipates cost savings to exceed $300 million by 2017.

On the second-quarter call, investor focus will be on the company’s performance as well as a possible revision in the guidance.

Why a Likely Positive Surprise?

For the second quarter of 2016, our proven model also shows that Zoetis is likely to beat earnings estimates because it has the right combination of two key ingredients.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +2.27%. This is a meaningful and leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank #1 (Strong Buy): Note that stocks with Zacks Ranks #1, #2 (Buy) and #3 (Hold) have a significantly higher chance of beating earnings. However, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The combination of Zoetis’ Zacks Rank #1 and +2.27% ESP makes us reasonably confident of an earnings beat this season.

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