Zoetis Inc.ZTSNYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $172.98 per share(market-calibrated)

+37.3%

Upside to Fair Value

Current

$125.98

Pure Model

$176.05

Fair Value

$172.98

Bull Case

$219.41

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 $147.05/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$147.05

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%	$226.07	$238.67	$255.75	$280.21	$296.84
6.81%	$191.62	$198.66	$207.55	$219.12	$234.82
7.81%	$166.44	$170.79	$176.05	$182.52	$190.70
8.81%	$146.78	$149.65	$153.03	$157.03	$161.87
9.81%	$130.77	$132.76	$135.05	$137.70	$140.80

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

9.8% vs current

• -25% vs analyst consensus
• Terminal growth: 2.5%
• Beta: 1.19

Base Case

$176.05

39.7% vs current

• Analyst consensus
• Terminal growth: 3.0%
• Beta: 0.95

Bull Case

$219.41

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.

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