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What Analysts Recommend for Zoetis in September 2017

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Part 3
What Analysts Recommend for Zoetis in September 2017 PART 3 OF 3

Zoetis Could Report Significant Rise in Net Profit Margins in 2017

Expense guidance

Despite manufacturing cost optimization benefits the company expects in 2H17 due to product rationalizations, Zoetis (ZTS) has raised its full-year 2017 guidance for cost of goods sold (or COGS) from the range of 32%–33% to 33%. This is attributed to the unfavorable impact of foreign exchange fluctuations and inventory charges.

In 1Q17, Zoetis’s COGS was 35.6% of its total revenues, while it improved to 34.4% of the total revenues in 2Q17. Changes in cost methodology coupled with disproportionate levels of costs that were recognized by Zoetis in 1H17 but were associated with previously produced inventory have been pushing up COGS as the percentage of revenues in 2017.

Zoetis Could Report Significant Rise in Net Profit Margins in 2017

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Zoetis has projected its adjusted selling, general, and administrative (or SG&A) expenses to fall in the range of $1,285 million to $1,325 million in 2017. The company has projected its full-year 2017 adjusted research and development (or R&D) expenses to fall in the range of $365 million to $385 million. The higher R&D expenses are attributed to investments associated with the acquisition of Nexvet Biopharma completed on July 31, 2017.

Rise in net profit margins

Wall Street analysts have projected Zoetis’s 2017 net profit margins to be around 21.2%, which is year-over-year (or YoY) growth of around 440 basis points. In 2017, peers Merck (MRK), Eli Lilly (LLY), and Sanofi (SNY) are expected to report net profit margins close to 40.3%, 11.3%, and 13.9%, respectively.

Zoetis has reduced its 2017 effective tax rate guidance from its previous guidance of 30% to 29%, which is attributed to favorable changes in jurisdictional mix and to certain one-time events that occurred in 1H17. Further, since the company derives around 50% of its adjusted pre-tax income from the US market, any reduction in corporate tax rates is expected to have a positive impact on the company’s adjusted net income in 2017.

Zoetis expects its full-year 2017 adjusted EBIT margin to fall in the range of 34% to 35%. The company has also projected its adjusted net income for full-year 2017 to fall in the range of $1,140 million–$1,175 million, while full-year 2017 adjusted diluted earnings per share (or EPS) is expected to fall in the range of $2.30–$2.70. In addition to increasing net income, adjusted diluted EPS guidance for 2017 also considers the $125 million worth of share repurchases completed by Zoetis in 2Q17.

Notably, Zoetis accounts for around 1.0% of the Health Care Select Sector SPDR Fund’s (XLV) total portfolio holdings.

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