Pfizer’s shares have gained 50% in the five years since it used an initial public offering to set up its animal-drug business as Zoetis. It then offered its remaining shares to investors. The new company now plans to sell or spin off its consumer business, which could push the stock even higher.

Zoetis, which has seen its shares triple since the split, should continue to profit from rising levels of pet ownership.

PFIZER INC. $42 (New York symbol PFE; Manufacturing & Industry sector; Shares outstanding: 5.9 billion; Market cap: $247.8 billion; Dividend yield: 3.2%; Takeover Target Rating: Low; www.pfizer.com) is a leading prescription drugmaker. Its top-selling brands include Lyrica (epilepsy), Celebrex and Enbrel (arthritis), and Prevnar (pneumonia).

In June 2013, Pfizer set up its animal health business as a separate firm called Zoetis (see next page). Pfizer then invited its shareholders to swap PFE shares for Zoetis shares at a 7 percent discount.

• Pfizer was founded in 1849 by cousins Charles Pfizer and Charles F. Erhart in New York City as a manufacturer of fine chemicals.
• First sold shares to the public in 1942
• Spun off animal drug business as Zoetis in June 2013

Pfizer’s revenue from its ongoing operations fell 5.3%, from $51.6 billion in 2013 to $48.9 billion in 2015. That’s partly because it continues to face more competition from generic drugs as many of its main products lose their patent protection.

In response, the company has acquired smaller drugmakers with promising products. They include Hospira, which Pfizer purchased for $17 billion in September 2015. Hospira makes copies of biologic drugs (biosimilars) that have lost patent protection.

With those new businesses, overall revenue improved to $52.8 billion in 2016. However, revenue dipped 0.5% to $52.5 billion in 2017 after the company sold its Hospira Infusion Systems business for $900 million. That operation makes intravenous pumps. On a comparable basis, revenue gained 1.5%.

Overall earnings fell 10.0%, from $15.3 billion in 2013 to $14.5 billion in 2014. However, earnings per share gained 1.8%, from $2.22 to $2.26, on fewer shares outstanding. Pfizer’s earnings then fell to $2.20 a share (or a total of $13.8 billion) in 2015, before rebounding to $2.40 a share (or $14.8 billion) in 2016, and rising again in 2017 to $2.65 a share (or $16.1 billion).

In the second quarter of 2018, Pfizer’s earnings jumped 18.8%, to $4.8 billion from $4.1 billion a year earlier. Due to fewer shares outstanding, earnings per share improved 20.9%, to $0.81 from $0.67.

The higher earnings are partly due to cost savings following the Hospira purchase—Pfizer expects to cut $1 billion from its annual costs by the end of 2018. The recent U.S. tax reforms also lowered its effective tax rate.

Revenue in the quarter rose 4.4%, to $13.5 billion from $12.9 billion a year earlier on stronger sales of new drugs such as Eliquis (anti-stroke), Ibrance (a cancer treatment) and Xeljanz (arthritis), as well as biosimilars.

Pfizer continues to spend heavily to develop new drugs. In the latest quarter, it spent 13.3% of revenue on research.

The company is currently studying options for its Consumer Healthcare business. It makes over-the-counter medications, and accounts for 7% of revenue. Depending on the results of the review, the company may opt to sell all or part of that business or spin it off. It expects to complete the process by the end of this year.

For all of 2018—and including its consumer division— Pfizer expects to earn between $2.95 and $3.05 a share. The stock trades at just 14.0 times the midpoint of that range. The $1.36 dividend yields 3.8%.

Pfizer is a buy.

ZOETIS INC. $90 (New York symbol ZTS; Manufacturing & Industry sector; Shares outstanding: 481.8 million; Market cap: $43.4 billion; Dividend yield: 0.6%; Takeover Target Rating: Medium; www.zoetis.com) makes medicines and vaccines for animals. In 2017, products for livestock animals made up 57% of its sales. Companion animals (pets) accounted for 42%. The manufacturing services it supplies to other firms contributed the remaining 1%.

The company’s sales rose 4.9%, from $4.56 billion in 2013 to $4.79 billion in 2014. Zoetis gets half of its sales from international markets, and unfavourable exchange rates caused its sales to slip 0.4% to $4.77 billion in 2015. Sales rebounded by 2.6% to $4.89 billion in 2016, and rose again by 8.6% to $5.31 billion in 2017.

Overall earnings jumped 67.1%, from $709 million in 2013 to $1.19 billion in 2017. Per-share earnings rose 69.0%, from $1.42 to $2.40, on fewer shares outstanding.

In the second quarter of 2018, sales rose 11.5%, to $1.42 billion from $1.27 billion. That’s partly due to successful new products (Zoetis spends 7% of its sales on research). Earnings jumped 43.7%, to $375 million from $261 million, while per-share earnings rose 45.3%, to $0.77 from $0.53.

The company has $1.6 billion in cash and its long-term debt of $5.0 billion is just 12% of its market cap.

In July 2018, Zoetis paid $2 billion for Abaxis, a maker of diagnostic equipment for veterinarians. The new operations should begin contributing to earnings in 2019.

The stock trades at 29.5 times the 2018 forecast earnings of $3.05 a share. The $0.504 dividend yields 0.6%.

Zoetis is a spinoff buy.