We think that Zoetis stock (NYSE: ZTS) currently is a better pick compared to its peer Merck stock (NYSE: MRK), despite Zoetis being the more expensive of the two, trading at 9x trailing revenues, compared to just 4x for Merck. This valuation gap can be attributed to Zoetis’ better profitability.
If we look at stock returns, Merck’s 16% growth is much better than the -14% return for Zoetis stock over the last twelve months. This marks an outperformance with an -8% change in the broader S&P 500 index. While both the companies are likely to see stock price growth, Zoetis is expected to outperform.
There is more to the comparison, and in the sections below, we discuss why we believe that ZTS stock will offer better returns than MRK stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Merck vs. Zoetis: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Zoetis’ Revenue Growth Was Stronger In Recent Years
- Both companies posted sales growth over the last twelve months. Still, Merck’s revenue growth of 29% is higher than 12% for Zoetis.
- However, if we look at a longer time frame, Merck’s sales grew at an average growth rate of 5.3% to $48.7 billion in 2021, compared to $42.3 billion in 2018, while that of Zoetis grew at 10.2% to $7.8 billion in 2021, compared to $5.8 billion in 2018.
- Zoetis is an animal health company that benefited from an increased animal adoption in the U.S., aiding its sales of parasiticide products for companion animals over the recent years.
- Merck is a diversified pharmaceutical company, with the animal health business accounting for over 12% of its total sales.
- Merck, over the recent quarters, has benefited from label expansion of Keytruda and a rebound in demand for vaccines, primarily Gardasil, after a fall in 2020, due to the impact of the pandemic.
- Looking at the company’s animal health business, the sales rose 29% to nearly $6.0 billion in 2021, compared to $4.6 billion in 2018.
- Our Merck Revenue and Zoetis Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Zoetis’ revenue is expected to grow faster than Merck’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 1.6% for Merck, compared to a 7.2% CAGR for Zoetis, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. Zoetis Is More Profitable
- Zoetis’ operating margin of 35% over the last twelve-month period is better than 29% for Merck.
- This compares with 32% and 19% figures seen in 2019, before the pandemic, respectively.
- Merck’s free cash flow margin of 31% is better than 27% for Zoetis.
- Our Merck Operating Income and Zoetis Operating Income dashboards have more details.
- Looking at financial risk, Zoetis’ 15% debt as a percentage of equity is marginally higher than 14% for Merck, while its 23% cash as a percentage of assets is much higher than just 9% for the latter, implying that Merck has a slightly better debt position and Zoetis has more cash cushion.
3. The Net of It All
- We see that Zoetis has demonstrated better revenue growth over the recent years, is more profitable, and has more cash cushion. On the other hand, Merck has a slightly better debt position and is trading at a lower valuation than Zoetis.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Zoetis is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Merck and Zoetis over the next three years and points to an expected return of 19% for Zoetis over this period vs. a 10% expected return for Merck stock, implying that investors are better off buying ZTS over MRK, based on Trefis Machine Learning analysis – Merck vs. Zoetis – which also provides more details on how we arrive at these numbers.
While ZTS stock may outperform MRK, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Electronic Arts vs. Emergent Biosolutions.
|S&P 500 Return||-3%||-16%||78%|
|Trefis Multi-Strategy Portfolio||-4%||-23%||204%|
 Month-to-date and year-to-date as of 6/13/2022
 Cumulative total returns since the end of 2016
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