Is Zoetis Inc. (NYSE:ZTS) Trading At A 29% Discount?

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Zoetis fair value estimate is US$247

  • Zoetis is estimated to be 29% undervalued based on current share price of US$176

  • The US$215 analyst price target for ZTS is 13% less than our estimate of fair value

Does the November share price for Zoetis Inc. (NYSE:ZTS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Zoetis

What's The Estimated Valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$2.63b

US$2.96b

US$3.31b

US$3.63b

US$3.88b

US$4.10b

US$4.29b

US$4.46b

US$4.63b

US$4.78b

Growth Rate Estimate Source

Analyst x5

Analyst x5

Analyst x3

Analyst x3

Est @ 6.83%

Est @ 5.57%

Est @ 4.68%

Est @ 4.06%

Est @ 3.63%

Est @ 3.33%

Present Value ($, Millions) Discounted @ 5.9%

US$2.5k

US$2.6k

US$2.8k

US$2.9k

US$2.9k

US$2.9k

US$2.9k

US$2.8k

US$2.8k

US$2.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$28b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.9%.

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