Hook and thesis
Zoetis (ZTS) was one of my most criticized calls in 2025. Weakness in dermatology, parasiticides, and osteoarthritis therapeutics pressured growth and sentiment. Still, the business generates durable free cash flow, the company beat on Q4 results, and management guided 2026 EPS above the Street. That combination — real cash generation plus a better-than-feared guide — is the kind of asymmetry I like to buy when sentiment is poor.
In short: I’m doubling down. I see a clear recovery path if key segments stabilize and livestock macro pressures ease. The trade is explicit: buy ZTS at $126.65, stop at $116.00, target $155.00, and plan to hold for up to 180 trading days (long term - 180 trading days) unless the thesis breaks.
What Zoetis does and why the market should care
Zoetis develops and sells medicines, vaccines, diagnostics, and precision animal health tools to both companion animals (pets) and livestock. The company’s franchise is split across recurring, high-margin companion-animal care and more cyclical livestock segments. Investors should care because companion-animal spending is structurally growing (humanization of pets, higher veterinary spend), which supports pricing and margin resilience; Zoetis also benefits from scale in vaccines and diagnostics that make it hard for smaller players to displace them.
Recent performance and the fundamental driver
On 02/12/2026 Zoetis reported Q4 2025 adjusted EPS of $1.48, beating consensus of $1.40, and revenue of $2.387 billion, up 3% year-over-year. Management issued 2026 EPS guidance of $7.00 to $7.10, which came in above Street expectations and implies not just stabilization but a degree of operational leverage relative to 2025.
Key balance and cash-flow facts that underpin my bullish tilt:
- Market capitalization sits around $55.79 billion while enterprise value is roughly $60.19 billion, a reminder the balance sheet carries meaningful leverage.
- Free cash flow last reported is $2.283 billion, which supports dividends, buybacks, and debt service.
- Trailing metrics: P/E around 20x on trailing EPS (~$6.33) but nearer ~18x on management’s 2026 midpoint guide of $7.05 — a modest multiple for a market leader with recurring revenue.
- Return on equity is extremely strong (about 80%), highlighting high incremental returns on invested capital in the franchise; return on assets is healthy at ~17%.
- Dividend yield is approximately 1.6% and the company has an upcoming ex-dividend date on 04/20/2026 and payable date 06/02/2026 — not the primary reason to own the stock but a modest income kicker.
Valuation framing
At $126.65 today the stock trades in the high-teens to low-20s multiple range depending on which EPS you use. Using trailing EPS of $6.33 yields roughly a 20x multiple; using management’s guidance midpoint of $7.05 drops the multiple closer to 18x. EV/EBITDA sits around 14.7x and price-to-free-cash-flow is ~23.4x.
Qualitatively, that’s not screaming cheap for a growth stock — but it’s reasonable for a stable, cash-generative leader in a fragmented market where pricing power and scale matter. The punchline is this: you’re not paying a SaaS multiple for one-time earnings growth; you’re paying for steady cash generation and market share in companion animal health that should compound over time if product mix recovers.
Technical and sentiment context
Technicals are neutral-to-constructive: the 10-day SMA is $126.46, the 50-day SMA $126.18 and RSI ~52.7 — all consistent with a base rather than a momentum top. Short interest has been a moving target, with recent settled short interest around 14.15M shares (01/30/2026 report) and elevated short-volume readings on several recent trading days, indicating both skepticism and potential for quick squeezes if results surprise positively.
Trade plan (actionable)
Entry: Buy ZTS at $126.65.
Stop loss: $116.00. If the stock breaks materially below the recent low area around $115, the recovery thesis is likely invalid and downside risk increases materially.
Target: $155.00. That’s the primary exit to realize a constructive rebound toward mid-cycle valuation and a reacceleration in growth + margin recovery.
Horizon: long term (180 trading days). I expect revenue mix stabilization and clearer visibility on product recovery within a couple of quarters; 180 trading days gives time for those operational updates to show through while keeping position discipline.
If you prefer staged exposure, scale into the full size on a 2-part plan: half at $126.65 and add the remainder on a pullback into the $120 area or on any intraday weakness with strongly improving volume profile.
Catalysts that could drive the trade
- Segment stabilization - if dermatology, parasiticides and osteoarthritis franchises show sequential improvement in upcoming quarters, sentiment could flip quickly.
- Livestock recovery - easing macro pressures in livestock markets would remove a near-term overhang to revenue growth.
- Better-than-feared 2026 quarterly prints - management guided $7.00-$7.10 for 2026; beats would compress perceived risk and support multiple expansion.
- Operational leverage / margin expansion - modest cost discipline or product mix improvement can meaningfully lift free cash flow conversion.
- Corporate actions - continued buybacks or a clearer capital return cadence would be a near-term support for the share price.
Risks and counterarguments
Every trade has risks. Here are the main ones and how they could play out:
- Persistent weakness in key segments: Dermatology, parasiticides, and osteoarthritis products were called out as soft in Q4. Continued declines would push revenue and margin assumptions lower and could force guidance cuts.
- Livestock macro remains weak: If commodity cycles or farmer economics worsen, livestock revenues could underperform expectations for longer than the market anticipates.
- Leverage and balance-sheet risk: Debt-to-equity is elevated (around 2.71), which increases sensitivity to cash-flow misses and limits flexibility for aggressive buybacks or M&A if earnings slip.
- Competition and pricing pressure: A more aggressive competitive response in high-margin companion-animal therapies could blunt pricing power and prolong recovery.
- Volatility from short sellers: Elevated short volume history means the name can move quickly on news or headline risk.
Counterargument: The bear case is credible — if the structural problems in the referenced segments are not cyclical but secular, then paying 18-20x on guidance will look expensive and the stock could re-test the $115 area or below. If that happens, I will re-evaluate exposure and either tighten stops or move to the sidelines; my current stop at $116 is designed explicitly to limit that downside.
What would change my mind
I will change my view if one or more of the following occurs: (a) management materially lowers 2026 guidance, (b) free cash flow falls meaningfully below the $2.283 billion level without any offsetting capital return program, or (c) a structural market-share loss emerges in core companion-animal categories. Conversely, sustained sequential improvement in the soft segments or an unexpected livestock recovery would reinforce the thesis and likely prompt me to take partial profits on the way toward the $155 target.
Conclusion
Zoetis is not a low-volatility, lockdown-safe stock right now — it’s a market leader that has been pushed lower by genuine execution and cyclical issues. But the combination of strong cash flow ($2.283B FCF), a forward-looking guide above expectations ($7.00-$7.10 for 2026), reasonable multiples (~18-20x), and a structurally growing companion-animal market makes this a tradeable long with a defined downside. Buy at $126.65, use a $116 stop, and target $155 over the next 180 trading days. Size the position to your tolerance for headline-driven volatility and use the stop to control asymmetric downside while you wait for proof of recovery.
Key tactical reminder: This is a risk-managed trade, not a buy-and-forget long. Monitor upcoming quarterly prints and segment commentary closely; those will determine whether this doubling-down call plays out or requires a prompt exit.