Looking For A Better Entry Point, BMO Downgrades Zoetis Shares

Citing upcoming risks and not enough upside, BMO Capital Markets analyst Alex Arfaei has downgraded Zoetis Inc ZTS to Market Perform.

“Although we expect a good 2Q17, we doubt it will meaningfully change the company's long-term growth prospects. With consensus estimates rising to meet ours, ZTS seems like a crowded long. While we recognize potential upside drivers, at these levels, we believe they are balanced by downside risk,” said Arfaei.

3 Key Takeaways

1. In 2016, BMO viewed Zoetis as a company with a very durable and resilient business. However, Arfaei no longer sees this as a case and believes BMO’s 2016 theses has materialized.
2. While BMO still expects Zoetis to have a solid Q2 report, Arfaei does not believe it will have a large enough impact on its long-term theses.
3. Arfaei sees a very balanced risk/reward opportunity with Zoetis.

Potential Rewards: Better-than-expected U.S. livestock recovery, growth in emerging markets, and U.S. tax reform.

Potential Risks: Slower-than-expected U.S. livestock recovery, Zoetis could struggle entering into emerging markets, the emergence of antibiotic-resistant bacteria.

Year to date, Zoetis is up 16 percent.