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Zoetis (ZTS): Stock Likely to Beat on Earnings in Q1 Again?

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Zoetis Inc. (ZTS - Free Report) is scheduled to report first-quarter 2016 results on May 4, before the opening bell. Last quarter, the company easily beat expectations with a positive earnings surprise of 10.26%. Let’s see how things are shaping up for this announcement.

Factors to Consider

At the time of reporting fourth-quarter 2015 earnings results, Zoetis updated its 2016 guidance to reflect the impact of the European Commission’s tax rulings in Belgium, foreign exchange rates as of late January, and changes related to the company’s accounting for its operations in Venezuela. For 2016, the company expects earnings in the range of $1.71 to $1.81 per share on revenues of $4.65 billion and $4.775 billion.

Meanwhile, Zoetis’ robust and diversified product portfolio including products for livestock and companion animals should continue to drive top-line growth at the company. The top line should also benefit from the addition of products acquired from Abbott Laboratories’ (ABT - Free Report) Animal Health business (acquired in Feb 2015), the Nov 2015 Pharmaq acquisition as well as from the performance of Apoquel and other key brands.

However, the company expects to see a greater impact from Apoquel in the second quarter of 2016 as it increases the availability of the product in the existing markets and launches it in new markets. Moreover, Zoetis doesn’t expect to see the impact from new product launches in the first quarter and anticipates these products to ramp up during the year.

Considering that Zoetis’ comprehensive operational efficiency initiatives (announced in May 2015) are anticipated to be largely complete in the second half of the year, the company expects to witness the positive impact from these initiatives in the second half of the year than in the first half.

On the first-quarter call, investor focus will be on the company’s performance as well as on the company’s update on 2016 guidance.

Surprise History

Zoetis’ track record has been impressive with the company beating earnings estimates consistently. In fact, Zoetis has posted a positive earnings surprise in each of the trailing four quarters, with an average beat of 14.81%.

Why a Likely Positive Surprise?

For the first 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 +2.44%. This is a meaningful and leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank #3 (Hold): Note that stocks with Zacks Ranks #1 (Strong Buy), #2 (Buy) and #3 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 #3 and +2.44% ESP makes us reasonably confident of an earnings beat this season.

Other Stocks that Warrant a Look

Here are a couple of other health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Genocea Biosciences, Inc. (GNCA - Free Report) has an Earnings ESP of +2.50% and a Zacks Rank #3. The company is scheduled to release first-quarter results on May 5.

Jazz Pharmaceuticals plc (JAZZ - Free Report) has an Earnings ESP of +4.58% and a Zacks Rank #3. The company is scheduled to release first-quarter results on May 10.

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