Healthcare Positions

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ZTS is the leader in the animal health industry with a history of innovating in pet care. They grow revenues in the high single digits with best in class 38% EBIT margins. The latest innovation we are excited about is in arthritis medications for dogs and cats that will ramp in the next 3 years.
 

Our differentiated view centers around the ramp of these arthritis products and drives steadily widening variance from consensus revenue and earnings estimates through 2026. Our analyst, Jonathan Berger, projects revenue of $11.7B in 2026 with double digit growth each year vs consensus of $10.3B with ~6-7% growth each year. His earnings estimates rise from roughly in line at $5.89 this year to $8.38 in 2026 vs estimates of ~$7.00.  

Most Americans know UNH as the largest healthcare insurance company serving nearly half the population. What some don’t know is their initiatives in pharmacy, telehealth, and other services. Healthcare is likely to increase from 18% to 25% of GDP by 2040 and UNH will disproportionately participate in that trend.
 

Our analyst and sector leader, Nupur Ballal, is most excited about the growth from the Optum pharmacy and services businesses coupled with the secular trend related to an aging population. She sees top line growth accelerating to 14% in 2026 driven by Optum versus consensus models at +7-8%. For EPS in 2026, she is at $41.40 versus consensus of $35 and sees current concerns about medical loss ratio and government regulatory and antitrust issues as manageable. Her $672 price target is based on a 20x P/E multiple on 2026 EPS (discounted)  

 18 month price target of $287.65 with 2026 EPS of $23.09 and a 15 P/E is a 28.5% upside from today’s price of $223.91. This is driven by:

Dx having 8.1% YoY revenue growth by 2027 (1% more than consensus) due to (1) growth within hospital systems and (2) tests in high demand areas. However, the main variance in our outlook is BLS achieving 17.4% operating margins by 2027 (2.2% greater than current operating margins) due to (1) artificial intelligence making both early development research and testing more efficient and (2) acquisition of cell and gene therapy technology. This margin expansion drives EPS estimates 25% above consensus in 2026


Dx:

(1) Expansion within hospital systems will increase Medicare/Medicaid and Client revenue to 7.9% YoY growth by 2026 (currently 5% and 6.5% respectively) 
There are currently 56 million people enrolled in Medicare and there will be over 80 million by 2031.

(2) LH will focus on 4 specialty areas that will grow 2-3x the rate of the typical diagnostic growth rate: oncology, women's health, autoimmune and neurology.

BLS:

(1) Innovative acquisitions will drive Early Development Research revenue to grow from -6.4% in 2024 to 5% in 2026.

(2) Cost as a percentage of revenue for the BLS segment will drop from 86% in 2024 to 82% in 2026 as artificial intelligence continues to make the drug discovery process more efficient.

 Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.