Zoetis Inc. (NYSE:ZTS) shares are up more than 3.54% this year and recently increased 0.92% or $0.68 to settle at $74.59. Diplomat Pharmacy, Inc. (NYSE:DPLO), on the other hand, is up 24.71% year to date as of 01/10/2018. It currently trades at $25.03 and has returned 20.51% during the past week.
Zoetis Inc. (NYSE:ZTS) and Diplomat Pharmacy, Inc. (NYSE:DPLO) are the two most active stocks in the Drugs – Generic industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ZTS to grow earnings at a 13.72% annual rate over the next 5 years. Comparatively, DPLO is expected to grow at a 15.21% annual rate. All else equal, DPLO’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 2.04% for Diplomat Pharmacy, Inc. (DPLO). ZTS’s ROI is 13.80% while DPLO has a ROI of 4.70%. The interpretation is that ZTS’s business generates a higher return on investment than DPLO’s.
The value of a stock is simply the present value of its future free cash flows. ZTS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.69. Comparatively, DPLO’s free cash flow per share was +0.37. On a percent-of-sales basis, ZTS’s free cash flow was 6.88% while DPLO converted 0.58% of its revenues into cash flow. This means that, for a given level of sales, ZTS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. ZTS has a current ratio of 2.80 compared to 1.30 for DPLO. This means that ZTS can more easily cover its most immediate liabilities over the next twelve months. ZTS’s debt-to-equity ratio is 2.87 versus a D/E of 0.23 for DPLO. ZTS is therefore the more solvent of the two companies, and has lower financial risk.
ZTS trades at a forward P/E of 27.23, a P/B of 18.33, and a P/S of 7.12, compared to a forward P/E of 25.91, a P/B of 2.64, and a P/S of 0.35 for DPLO. ZTS is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. ZTS is currently priced at a 0% to its one-year price target of 74.59. Comparatively, DPLO is 24.59% relative to its price target of 20.09. This suggests that ZTS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for ZTS and 2.60 for DPLO, which implies that analysts are more bullish on the outlook for DPLO.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.ZTS has a short ratio of 3.35 compared to a short interest of 8.46 for DPLO. This implies that the market is currently less bearish on the outlook for ZTS.
Zoetis Inc. (NYSE:ZTS) beats Diplomat Pharmacy, Inc. (NYSE:DPLO) on a total of 8 of the 14 factors compared between the two stocks. ZTS is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. ZTS is more undervalued relative to its price target. Finally, ZTS has better sentiment signals based on short interest.