Group 1 - The article emphasizes a contrarian investment strategy focused on high-quality companies that have temporarily lost favor in the market [1] - The investment approach is characterized by targeting companies with sharply declining or stagnant share prices while maintaining strong earnings performance [1] - The author has extensive experience in financial advising and equity research, having assisted over 1,000 clients and managed an independent stock market research service [1] Group 2 - The investment philosophy is influenced by renowned investors such as Warren Buffett, Charlie Munger, Peter Lynch, and Philip Fisher, highlighting a preference for long-term investments in high-quality companies at attractive prices [1]

Core Viewpoint - The healthcare sector is currently undervalued, presenting opportunities for investors to acquire quality stocks at discounted prices [1][2]. Group 1: Zoetis - Zoetis operates in the animal health industry, providing a wide range of drugs and healthcare products for companion animals and livestock, with a portfolio of approximately 300 product lines [3][4]. - The animal health market is projected to grow from $48 billion in 2023 to between $75 billion and $85 billion by 2033, with Zoetis historically outpacing industry growth [4]. - Zoetis has a P/E ratio of 25, its lowest ever, and is expected to grow earnings by 9% to 10% annually over the next three to five years, making it an attractive long-term investment [5]. Group 2: Johnson & Johnson - Johnson & Johnson is a major player in pharmaceuticals and medical devices, having spun off its consumer products segment to focus on faster-growing areas [6][7]. - The company has a strong dividend history, having paid and raised its dividend for 63 consecutive years, with a current yield of 3% [7][8]. - The stock trades at a P/E ratio of 18, with expected annualized earnings growth of just over 7% in the coming years [8]. Group 3: Zimmer Biomet - Zimmer Biomet specializes in products for joint replacement, dental implants, and surgical robotics, addressing the needs of an aging population [9][10]. - The company has a low dividend payout ratio, currently at 12% of estimated 2025 earnings, indicating potential for significant dividend growth [11]. - Zimmer Biomet trades at 11 times 2025 earnings estimates, with expected earnings growth of 5% to 6% annually over the next three to five years [12].

Company Performance - Over the past decade, an investment in Zoetis (ZTS) would have grown by 227%, averaging an annual return of 12.6% [2] - However, the S&P 500 outperformed Zoetis with an average annual gain of 12.7% during the same period [2] - In shorter time frames, Zoetis shares have underperformed, with annual average declines of 18.7%, 4.25%, and 0.43% over the past one, three, and five years respectively [3] Growth Potential - Zoetis has significant growth potential, having been spun off from Pfizer in 2013 and now leading in market share across various animal health segments [4] - The company has made strategic acquisitions to enhance its market position [4] Resilience and Dividends - The company is considered somewhat recession-proof, as animal health care is essential for both livestock and pets [6] - Zoetis offers a dividend yield of 1.3%, with total annual payouts increasing from $0.50 in 2018 to $1.93 per share recently [7] - The current forward-looking price-to-earnings (P/E) ratio of 24 is below the five-year average of 32, suggesting shares may be undervalued [7]

Core Viewpoint - The analysis compares Sandoz Group AG Sponsored ADR (SDZNY) and Zoetis (ZTS) to determine which stock represents a better value investment opportunity for investors interested in the medical drugs sector [1]. Group 1: Zacks Rank and Valuation Metrics - Sandoz Group AG has a Zacks Rank of 2 (Buy), indicating a positive earnings outlook, while Zoetis has a Zacks Rank of 3 (Hold) [3]. - The Zacks Rank system emphasizes companies with positive earnings estimate revisions, suggesting that SDZNY is likely experiencing a more favorable earnings outlook compared to ZTS [3]. - Value investors utilize various valuation metrics, including P/E ratio, P/S ratio, earnings yield, and cash flow per share, to assess whether a company is undervalued [4]. Group 2: Specific Valuation Comparisons - SDZNY has a forward P/E ratio of 17.91, while ZTS has a higher forward P/E of 23.28, indicating that SDZNY may be undervalued relative to ZTS [5]. - The PEG ratio for SDZNY is 0.98, compared to ZTS's PEG ratio of 2.42, further suggesting that SDZNY offers better value considering expected earnings growth [5]. - SDZNY's P/B ratio is 3.17, significantly lower than ZTS's P/B ratio of 13.14, reinforcing the notion that SDZNY is a more attractive value option [6]. Group 3: Overall Assessment - The improving earnings outlook for SDZNY, combined with favorable valuation metrics, positions it as the superior value investment compared to ZTS [7].

Financial Performance - Zoetis reported a beat and raised quarter, exceeding estimates and raising guidance [1][2] - Innovative franchises, including pain, Labrella, dermatology, and parasitics, experienced 11% growth [3] Product Performance & Challenges - Labrella, an osteoarthritis pain product for dogs, is facing headwinds despite high customer satisfaction with over 75% of pet owners being extremely or very satisfied [3][4] - Zoetis is focusing on medical education and awareness to drive Labrella adoption [4] Tariff & Manufacturing Strategy - The impact of potential pharmaceutical tariffs on animal health is unclear, but Zoetis argues for exclusion [5][7] - Zoetis has invested $1 billion in American manufacturing over the last 5 years [8] - 75% of Zoetis' sales in the United States are manufactured in the United States [8] - 60% of Zoetis' global manufacturing is in the US, while only 50% of its sales are in the US, making it a net exporter [8] - Almost 100% of Zoetis' intellectual property is located in the United States [9] Overall Strategy - Zoetis emphasizes its diverse, durable, and broad-based portfolio, strong pipeline, and strong supply chain [3][6] - Zoetis has multiple mitigation strategies in place to address the dynamic tariff environment [6]

PART I — FINANCIAL INFORMATION [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents Zoetis Inc.'s unaudited condensed consolidated financial statements, including statements of income, comprehensive income, balance sheets, equity, and cash flows for the periods ended June 30, 2025 and 2024, along with detailed notes explaining accounting policies, revenue disaggregation, divestitures, restructuring, financial instruments, and other key financial information [Condensed Consolidated Statements of Income (Unaudited)](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20(Unaudited)) This table presents the unaudited condensed consolidated statements of income for specified quarterly and semi-annual periods Condensed Consolidated Statements of Income (Unaudited) | (MILLIONS OF DOLLARS) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $2,460 | $2,361 | $4,680 | $4,551 | | Cost of sales | 649 | 668 | 1,271 | 1,311 | | Selling, general and administrative expenses | 617 | 581 | 1,180 | 1,128 | | Research and development expenses | 172 | 171 | 329 | 333 | | Amortization of intangible assets | 33 | 35 | 65 | 72 | | Restructuring charges and certain acquisition and divestiture-related costs | 30 | 42 | 30 | 46 | | Interest expense, net of capitalized interest | 53 | 59 | 107 | 117 | | Other (income)/deductions—net | 4 | 25 | (14) | 17 | | Income before provision for taxes on income | 902 | 780 | 1,712 | 1,527 | | Provision for taxes on income | 184 | 156 | 363 | 304 | | Net income attributable to Zoetis Inc. | $718 | $624 | $1,349 | $1,223 | | Basic EPS | $1.61 | $1.37 | $3.02 | $2.68 | | Diluted EPS | $1.61 | $1.37 | $3.02 | $2.67 | | Dividends declared per common share | $0.500 | $0.432 | $1.000 | $0.864 | [Condensed Consolidated Statements of Comprehensive Income (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) This table details unaudited condensed comprehensive income, including net income and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income (Unaudited) | (MILLIONS OF DOLLARS) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income before allocation to noncontrolling interests | $718 | $624 | $1,349 | $1,223 | | Unrealized losses on derivatives for cash flow hedges, net of tax | (4) | (1) | (17) | (1) | | Unrealized (losses)/gains on derivatives for net investment hedges, net of tax | (74) | 2 | (107) | 18 | | Foreign currency translation adjustments | 218 | (5) | 187 | (23) | | Total other comprehensive income/(loss), net of tax | 140 | (4) | 63 | (6) | | Comprehensive income attributable to Zoetis Inc. | $858 | $620 | $1,412 | $1,217 | [Condensed Consolidated Balance Sheets (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) This table provides unaudited condensed balance sheets, outlining assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets (Unaudited) | (MILLIONS OF DOLLARS) | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | **Assets** | | | | Cash and cash equivalents | $1,435 | $1,987 | | Accounts receivable, less allowance for doubtful accounts | 1,540 | 1,316 | | Inventories | 2,439 | 2,306 | | Other current assets | 509 | 377 | | Total current assets | 5,923 | 5,986 | | Property, plant and equipment, less accumulated depreciation | 3,537 | 3,391 | | Operating lease right-of-use assets | 302 | 219 | | Goodwill | 2,758 | 2,724 | | Identifiable intangible assets, less accumulated amortization | 1,075 | 1,127 | | Noncurrent deferred tax assets | 617 | 540 | | Other noncurrent assets | 267 | 250 | | Total assets | $14,479 | $14,237 | | **Liabilities and Equity** | | | | Current portion of long-term debt | $1,350 | $1,350 |\n| Accounts payable | 508 | 433 | | Dividends payable | 222 | 224 | | Accrued expenses | 770 | 746 | | Accrued compensation and related items | 293 | 441 | | Income taxes payable | 93 | 93 | | Other current liabilities | 130 | 125 | | Total current liabilities | 3,366 | 3,412 | | Long-term debt, net of discount and issuance costs | 5,231 | 5,220 | | Noncurrent deferred tax liabilities | 156 | 167 | | Operating lease liabilities | 210 | 174 | | Other taxes payable | 265 | 272 | | Other noncurrent liabilities | 274 | 222 | | Total liabilities | 9,502 | 9,467 | | Total equity | 4,977 | 4,770 | | Total liabilities and equity | $14,479 | $14,237 | [Condensed Consolidated Statements of Equity (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Equity%20(Unaudited)) This table presents unaudited condensed equity statements, detailing changes in common stock, treasury stock, retained earnings, and comprehensive loss Condensed Consolidated Statements of Equity (Unaudited) - Six Months Ended June 30, 2025 | (MILLIONS OF DOLLARS AND SHARES) | Common Stock Shares | Common Stock Amount | Treasury Stock Shares | Treasury Stock Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Equity | | :------------------------------- | :------------------ | :------------------ | :-------------------- | :-------------------- | :------------------------- | :---------------- | :----------------------------------- | :----------- | | Balance, December 31, 2024 | 501.9 | $5 | 53.4 | $(7,445) | $1,182 | $11,968 | $(940) | $4,770 | | Net income | — | — | — | — | — | 1,349 | — | 1,349 | | Other comprehensive income | — | — | — | — | — | — | 63 | 63 | | Share-based compensation awards | — | — | (0.3) | 7 | 21 | — | — | 28 | | Treasury stock acquired | — | — | 4.8 | (788) | — | — | — | (788) | | Dividends declared | — | — | — | — | — | (445) | — | (445) | | Balance, June 30, 2025 | 501.9 | $5 | 57.9 | $(8,226) | $1,203 | $12,872 | $(877) | $4,977 | Condensed Consolidated Statements of Equity (Unaudited) - Six Months Ended June 30, 2024 | (MILLIONS OF DOLLARS AND SHARES) | Common Stock Shares | Common Stock Amount | Treasury Stock Shares | Treasury Stock Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Equity | | :------------------------------- | :------------------ | :------------------ | :------------------ | :-------------------- | :------------------------- | :---------------- | :----------------------------------- | :----------- | | Balance, December 31, 2023 | 501.

Core Insights - Zoetis, Inc. (ZTS) reported second-quarter 2025 adjusted earnings of $1.76 per share, exceeding the Zacks Consensus Estimate of $1.62 and up from $1.56 in the same quarter last year [1] - Total revenues for the quarter reached $2.46 billion, a 4% year-over-year increase, surpassing the Zacks Consensus Estimate of $2.40 billion and the previous year's revenue of $2.36 billion [1] Revenue Breakdown - The U.S. segment revenues increased by 4% year over year to $1.36 billion, beating both the Zacks Consensus Estimate of $1.33 billion and the model estimate of $1.31 billion [2] - Sales of companion animal products in the U.S. rose by 9% to $1.18 billion, driven by products like Simparica Trio and key dermatology items, although this was partially offset by a decline in monoclonal antibody sales for osteoarthritis pain [3] - International segment revenues grew by 3% year over year to $1.07 billion, exceeding the Zacks Consensus Estimate of $1.05 billion [7] - Ex-U.S. sales of companion animal products increased by 8% to $612 million, supported by growth in various key products [8] - Livestock product sales in the U.S. decreased by 21% to $180 million, primarily due to the divestiture of the medicated feed additive product portfolio [5] Future Guidance - Zoetis raised its 2025 adjusted earnings outlook to a range of $6.30-$6.40 per share, up from the previous range of $6.20-$6.30 [10] - Revenue guidance for 2025 was also increased to $9.45-$9.6 billion from the earlier range of $9.425 billion to $9.575 billion [10]

Core Insights - Zoetis reported revenue of $2.46 billion for the quarter ended June 2025, marking a year-over-year increase of 4.2% and an EPS of $1.76, up from $1.56 a year ago, exceeding both revenue and EPS estimates [1] Financial Performance - The reported revenue of $2.46 billion surpassed the Zacks Consensus Estimate of $2.4 billion by 2.44% [1] - The EPS surprise was +8.64%, with the consensus EPS estimate being $1.62 [1] Geographic Revenue Breakdown - U.S. Revenue: $1.36 billion, exceeding the average estimate of $1.33 billion, reflecting a year-over-year increase of 3.7% [4] - International Revenue: $1.07 billion, slightly above the estimated $1.05 billion, with a year-over-year change of +3.4% [4] - Companion Animal Revenue: $1.79 billion, surpassing the average estimate of $1.76 billion, showing an increase of 8.4% year-over-year [4] - Livestock Revenue: $638 million, slightly above the estimated $625.62 million, but down 8.1% compared to the previous year [4] Segment Performance - Contract Manufacturing & Human Health: Revenue of $34 million, significantly above the average estimate of $21.18 million, representing an 88.9% year-over-year increase [4] - Companion Animal - Horses: Revenue of $72 million, exceeding the estimate of $29.58 million, with a year-over-year increase of 5.9% [4] - Livestock - Poultry: Revenue of $103 million, below the average estimate of $115.27 million, reflecting a year-over-year decline of 22% [4] - Livestock - Cattle: Revenue of $320 million, above the estimate of $294.87 million, but down 8.6% year-over-year [4]

Financial Data and Key Metrics Changes - The company reported $2.5 billion in revenue, growing 4% on a reported basis and 8% on an organic operational basis, excluding foreign exchange and the MFA divestiture [21] - Adjusted net income of $783 million grew 10% on both a reported and organic operational basis [21] - Organic operational revenue growth was balanced, driven by 4% price and 4% volume [21] Business Line Data and Key Metrics Changes - The companion animal portfolio generated $1.8 billion in revenue, growing 8% operationally [22] - The Simparica franchise contributed $448 million, growing 17%, while the key dermatology franchise posted $460 million, growing 11% [22] - The livestock segment achieved 6% organic operational revenue growth, driven by strong international performance [18][22] Market Data and Key Metrics Changes - The U.S. market grew 4% on a reported basis and 7% on an organic operational basis, with companion animal growing 9% and livestock declining 2% [23] - International revenue grew 3% on a reported basis and 9% on an organic operational basis, with companion animal growing 8% and livestock growing 10% [28] Company Strategy and Development Direction - The company is raising its full-year guidance for organic operational revenue growth to 6.5% to 8% based on strong first-half performance [19] - The focus remains on executing with discipline, advancing meaningful innovation, and staying connected to customer needs [20] - The company aims to leverage its leadership position in the market and continue to drive growth through innovation and differentiated products [17][20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term growth potential of the animal health sector, citing strong fundamentals and a diversified portfolio [20] - The company is focused on addressing competitive pressures and macroeconomic challenges while maintaining above-market growth [38] - Management highlighted the importance of compliance and education in driving adoption of new products like Librela [51][70] Other Important Information - The company is actively advancing its pipeline, with expectations for major market approvals every year for the next few years [71] - The adjusted gross margin was reported at 73.7%, with a favorable impact from foreign exchange [34] - The company continues to manage costs effectively while investing in long-term growth [61] Q&A Session Summary Question: Changes in strategy regarding competition in the Trioderm franchises - Management noted that they have not changed their strategy and continue to see strong growth in the Simparica franchise despite competition [45][46] Question: Expectations for Librela's growth and timing - Management is focused on medical education and third-party studies to support Librela's adoption, with expectations for growth potentially starting in 2026 [51][70] Question: Ability to achieve high single-digit operational growth next year - Management emphasized the broad-based results and innovation driving growth, with confidence in achieving above-market growth [58][60] Question: Strategies to promote Cytopoint in dermatology - Management highlighted the differentiated benefits of Cytopoint and the ongoing investment in all three dermatology products [78][79] Question: Clarification on contract manufacturing for human health - Management indicated that the increase in contract manufacturing is relatively small and not expected to be a recurring significant factor [83]

Financial Data and Key Metrics Changes - The company reported $2.5 billion in revenue for Q2 2025, growing 4% on a reported basis and 8% on an organic operational basis, excluding foreign exchange impacts and the MFA divestiture [19][20] - Adjusted net income reached $783 million, growing 10% on both a reported and organic operational basis [19][20] - Organic operational revenue growth was balanced, driven by 4% price and 4% volume [19] Business Line Data and Key Metrics Changes - The companion animal portfolio generated $1.8 billion in revenue, growing 8% operationally [20] - The Simparica franchise contributed $448 million, growing 17%, while the key dermatology franchise posted $460 million, growing 11% [20][21] - Livestock revenue declined 2% on an organic operational basis, primarily due to timing of supply [21][27] Market Data and Key Metrics Changes - The U.S. segment grew 4% on a reported basis and 7% on an organic operational basis, with companion animal growing 9% and livestock declining 2% [21][27] - International revenue grew 3% on a reported basis and 9% on an organic operational basis, with companion animal growing 8% and livestock growing 10% [27][31] Company Strategy and Development Direction - The company is focused on innovation and customer engagement, with a strong emphasis on expanding its portfolio and addressing unmet needs in animal health [15][19] - The company raised its full-year guidance for organic operational revenue growth to 6.5% to 8% based on strong first-half performance [17][18] - The strategy includes leveraging first-mover advantages in the parasiticides market and expanding into new therapeutic areas such as renal and oncology [72] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term growth potential of the animal health sector, citing strong fundamentals and a diversified portfolio [18][19] - The company is navigating challenges such as tariffs and competitive pressures while maintaining above-market growth [38][39] - Management highlighted the importance of compliance and education in driving adoption of new products like Librela [51][70] Other Important Information - The company reported adjusted gross margins of 73.7%, with a favorable impact from foreign exchange and improved pricing [32] - Adjusted operating expenses increased by 5% operationally, driven by higher advertising and promotion spending [33] Q&A Session Summary Question: Changes in strategy regarding competition in Trioderm franchises - Management noted that they have not changed their strategy and continue to see strong growth in the Simparica franchise despite competition [45][47] Question: Expectations for Librela's growth - Management is focused on medical education and third-party studies to support Librela's adoption, with expectations for growth potentially returning in 2026 [52][70] Question: Strategies to maintain market share in dermatology - Management emphasized the differentiation of their products and the ongoing investment in their pipeline to support growth in the dermatology franchise [77][80] Question: Impact of tariffs on animal health - Management indicated that the tariff environment remains dynamic but expressed confidence in the resilience of the animal health sector [102][104]