Zoetis Inc.ZTSNYSE
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DCF Valuation
DCF Valuation Summary
Strong Buy
Fair Value: $172.97 per share(market-calibrated)
+37.4%
Upside to Fair Value
Current
$125.93
Pure Model
$176.05
Fair Value
$172.97
Bull Case
$219.42
Bear Case
$138.34
Market Reality Check
Model Terminal Growth
3.00%
Market-Implied Growth
1.88%
Calibrated Growth
2.72%
Fair value uses 75% model / 25% market-implied terminal growth. Pure model: $176.05.
What's Driving This Ratingfor ZTS
↓
CapEx normalizing toward maintenance
Historical CapEx is 6.49% of revenue (heavy investment phase). Model fades this to 3.50% by Year 10, freeing up ~$421M in annual FCF. This is the biggest driver of long-term cash flow improvement.
✓
Premium margins already priced in
EBIT margin of 40.83% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.
→
Moderate revenue growth
Analyst consensus projects 4.77% revenue growth, fading to 3.00% by Year 10. Revenue reaches $14.1B (vs $9.5B today).
↔
Perpetuity and exit methods disagree
Perpetuity growth gives $147.06/share (21.4x terminal FCF) while exit multiple gives $205.04/share (33.0x terminal FCF). The 24x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 3.00% growth is more conservative. The base case averages both methods.
🎯
Market pricing in lower growth than model
The market implies only 1.88% perpetual growth — 112bps below the model's 3.00%. This suggests the market sees headwinds or risks not in the model.
✓
Strong cash flow conversion
Year 10 FCF/EBITDA conversion of 72.65% indicates efficient cash generation. FCF reaches $4.7B by Year 10 (33.32% FCF margin).
Weighted Average Cost of Capital (WACC)
Cost of Equity (CAPM)
Risk-Free Rate (Rf)4.50%
Beta (β)0.95
Market Risk Premium4.50%
*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)
Cost of Equity (Re)8.79%
Cost of Debt
Pre-tax Cost of Debt2.56%
Tax Rate20.45%
After-tax Cost of Debt2.04%
Equity Weight (E/V)85.47%
Debt Weight (D/V)14.53%
WACC Calculation
WACC = (E/V × Re) + (D/V × Rd × (1-Tc))
WACC = (85.47% × 8.79%) + (14.53% × 2.04%)
= 7.81%
10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)
| Year | Year 1 | Year 3 | Year 5 | Year 7 | Year 10 |
|---|---|---|---|---|---|
| Revenue | $9.9B | $10.9B | $11.8B | $12.8B | $14.1B |
| EBIT | $4.0B | $4.5B | $4.8B | $5.2B | $5.7B |
| Tax | $828M | $912M | $988M | $1.1B | $1.2B |
| NOPAT | $3.2B | $3.5B | $3.8B | $4.2B | $4.6B |
| + Depreciation | $500M | $551M | $597M | $645M | $710M |
| - Capex | $643M | $636M | $611M | $575M | $493M |
| - Δ NWC | $108M | $120M | $118M | $112M | $98M |
| Free Cash Flow | $3.0B | $3.3B | $3.7B | $4.1B | $4.7B |
| Discount Factor | 0.928 | 0.798 | 0.687 | 0.591 | 0.471 |
| Present Value | $2.8B | $2.7B | $2.5B | $2.4B | $2.2B |
FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital
Terminal Value Calculation
Perpetuity Growth Method
Year 10 FCF$4.7B
Terminal Growth Rate3.00%
WACC7.81%
TV = FCF₁₀ × (1+g) / (WACC-g)
Terminal Value$100.4B
PV of Terminal Value$47.3B
Exit Multiple Method
Year 10 EBITDA$6.5B
Exit Multiple (EV/EBITDA)24.0x
TV = EBITDA₁₀ × Exit Multiple
Terminal Value$155.0B
PV of Terminal Value$73.0B
Valuation Summary
Perpetuity Growth Method
PV of Projected FCFs$25.1B
PV of Terminal Value$47.3B
Enterprise Value$72.4B
(-) Net Debt$7.2B
Equity Value$65.2B
Shares Outstanding443M
Price per Share$147.06
Exit Multiple Method
PV of Projected FCFs$25.1B
PV of Terminal Value$73.0B
Enterprise Value$98.1B
(-) Net Debt$7.2B
Equity Value$90.9B
Shares Outstanding443M
Price per Share$205.04
Pure Model Fair Value
$176.05
Average of perpetuity growth and exit multiple methods (before market calibration)
Sensitivity AnalysisPrice per Share
| WACC ↓ / Growth → | 2.00% | 2.50% | 3.00% | 3.50% | 4.00% |
|---|---|---|---|---|---|
| 5.81% | $226.08 | $238.69 | $255.77 | $280.24 | $296.84 |
| 6.81% | $191.62 | $198.67 | $207.56 | $219.14 | $234.83 |
| 7.81% | $166.44 | $170.80 | $176.05 | $182.53 | $190.71 |
| 8.81% | $146.78 | $149.66 | $153.03 | $157.04 | $161.88 |
| 9.81% | $130.77 | $132.77 | $135.05 | $137.70 | $140.81 |
How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.
Scenario Analysis
Bear Case
$138.34
9.9% vs current
- • -25% vs analyst consensus
- • Terminal growth: 2.5%
- • Beta: 1.19
Base Case
$176.05
39.8% vs current
- • Analyst consensus
- • Terminal growth: 3.0%
- • Beta: 0.95
Bull Case
$219.42
74.2% vs current
- • +25% vs analyst consensus
- • Terminal growth: 3.5%
- • Beta: 0.81
Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Healthcare Sector
Growth Assumptions (Select Years)
Year 1 Revenue Growth4.77%
Year 3 Revenue Growth4.80%
Year 5 Revenue Growth4.31%
Year 7 Revenue Growth3.79%
Year 10 Revenue Growth3.00%
Terminal Growth Rate3.00%
Margin & Efficiency
Current EBIT Margin40.83%
Tax Rate20.45%
Historical Capex / Rev6.49%
Terminal Capex / Rev3.50%
NWC / Revenue24.02%
Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.
Institutional-Grade Methodology
Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta
Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 24x EV/EBITDA (Healthcare sector)
This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.