Zoetis (ZTS) Q3 Earnings: Stock Likely to Beat Estimates

Zoetis Inc.ZTS is scheduled to report third-quarter 2016 results on Nov 2, before the market opens. The company has consistently beaten earnings expectations. In fact, Zoetis' earnings surpassed expectations in each of the last four quarters, with an average positive surprise of 15.92%.

In the last reported quarter too, the company comfortably beat expectations with a positive earnings surprise of 11.36%. Will Zoetis be able to beat expectations this time around as well? Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

For the third quarter of 2016, our proven model shows that Zoetis is likely to beat earnings estimates because it has the right combination of two key ingredients.

Zacks ESP: The Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +2.17%. This is a meaningful and leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank: Zoetis carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 have a significantly higher chance of beating earnings. On the other hand, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The combination of Zoetis' favorable Zacks Rank and positive ESP makes us reasonably confident of an earnings beat this season. Please check our Earnings ESP Filter that enables you find stocks that are expected to come out with earnings surprises.

ZOETIS INC Price and EPS Surprise

ZOETIS INC Price and EPS Surprise | ZOETIS INC Quote

Factors to Consider This Quarter

Zoetis' diversified portfolio of products for livestock and companion animals should continue to drive top-line growth at the company. The company's companion animal business has been performing well in both the U.S. and internationally, and should continue to do so in the to-be-reported quarter. In the third quarter, the business will be driven by higher sales of Apoquel, several new product launches, including Simparica, and market expansion of key product lines.

Performance of the global livestock business has been benefiting from acquisitions/deals, mostly the Pharmaq acquisition (Nov 2015). However, the swine business is under pressure in the U.S. due to increased competition and poultry is declining globally due to market conditions and competitive pressure.

Nevertheless, during its second-quarter 2016 earnings call, Zoetis raised its outlook for 2016, buoyed by a strong performance in the first half of the year. The company now expects earnings in the range of $1.86 to $1.93 per share (old guidance: $1.83-$1.90) on revenues of $4.8 billion to $4.9 billion (old guidance: $4.775-$4.875 billion). Particularly, Zoetis expects second-half revenues to exceed first-half levels. However, the projected increase in second-half sales may be more than offset by lower gross margins, and the phasing of spending on promotional programs and R&D.

Meanwhile, growth in both the companion and livestock businesses has moderated due to the company's operational efficiency initiative, which includes business reductions in Venezuela and product rationalizations.

On the deals/acquisitions front, Zoetis acquired a veterinary diagnostic-focused company, Scandinavian Micro Biodevices, for $80 million, in Aug 2016. The acquisition is expected to add a suite of specialty test instruments and cartridges to Zoetis' diagnostics portfolio and pipeline.

On the third-quarter call, investor focus will be on the company's performance, a possible revision in the guidance, and its business development plans.

Other Stocks That Warrant a Look

Zoetis is not the only company looking up this earnings season. Here are some other health care stocks that you may want to consider as our model shows that they too have the right combination of elements to post an earnings beat this quarter.

Shire plc SHPG is scheduled to report third-quarter results on Nov 1. It has an Earnings ESP of +1.25% and a Zacks Rank #2.

The Earnings ESP for Aerie Pharmaceuticals, Inc. AERI is +8.57% and it carries a Zacks Rank #3. The company is slated to release third-quarter results on Nov 2.

ARIAD Pharmaceuticals Inc. ARIA is expected to report third-quarter results on Nov 1. It has an Earnings ESP of +5.26% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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