When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Zoetis Inc. (NYSE:ZTS) as a stock to avoid entirely with its 34.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Zoetis has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think Zoetis' future stacks up against the industry? In that case, our free report is a great place to start.
How Is Zoetis' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Zoetis' is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Pleasingly, EPS has also lifted 40% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 9.1% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10% per annum, which is not materially different.
With this information, we find it interesting that Zoetis is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Zoetis' P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Zoetis' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about this 1 warning sign we've spotted with Zoetis.
If these risks are making you reconsider your opinion on Zoetis, explore our interactive list of high quality stocks to get an idea of what else is out there.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com