Zoetis, essentially the only pure-play animal-health company, is nearly equally divided between its pet and livestock businesses.
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The lives of a pampered pet puppy and a factory-farmed piglet couldn’t be more different. Yet they are both likely to receive significantly more healthcare in their lifetimes than they would have just a few years ago. The winner in both cases is
Zoetis
.
Zoetis (ticker: ZTS), the world’s only pure-play global animal-health company, was spun out of
Pfizer
(PFE) nearly a decade ago. In that time, profits have marched relentlessly higher, helped by rising spending on domestic animals.
Macroeconomic concerns and a temporary slowdown in earnings growth have recently hurt the stock, which is down nearly 13% in the past year. Zoetis shares now trade below 30 times forward earnings, less than their five-year average of nearly 33 times—and their peak of close to 50. The average analyst forecast sees shares climbing 33%, to $219, from a recent $165.
“Zoetis looks to be a really good long-term bet,” says Craig Sarembock, principal at Bartlett Wealth Management, which recently added the stock to its portfolio. “It has always been a pricier stock, given it’s a monopolistic business model. But relative to its own valuation, it’s near a five-year low.”
Pet ownership worldwide was rising even before everyone adopted a pandemic pup, and pets are increasingly being treated as part of the family. That means not skimping on an increasing array of innovative treatment options when they fall ill. In addition, livestock populations have increased globally in tandem with rising animal-protein demand, with more than half of all antibiotics used to improve farm yields.
Those trends show no sign of slowing down, even as worries about a recession rising.
“Major secular tailwinds are in Zoetis’ favor, and it tends to be more defensive than many pharma companies,” says R. Burns McKinney, managing director and portfolio manager at NFJ Investment Group, which owns the stock. He notes the durability of the company’s revenue even during downturns like the 2007-09 recession.
“It’s also growing a lot faster than the broader market, with earnings forecast to climb an average of 13% annually over the next five years,” McKinney notes. “Zoetis generates huge margins and returns on capital and hasn’t posted a return on equity below 40% in over five years. That’s the best measure an investor can get on a company’s competitive advantage and moat.”
Consensus calls for earnings per share to climb 10.7% in 2023 to a record high of $5.40, on a 7% increase in revenue to $8.64 billion. Earnings are projected to rise another 12.3%, to $6.07, in 2024.
That’s up from sub-4% bottom-line growth in 2022, when animal-health was grappling with numerous headwinds, including veterinary staffing shortages, lockdown-dampened livestock growth in China, and difficult pandemic comparisons. As these headwinds fade, Zoetis should simultaneously get a boost from new product introductions.
Joseph Ghio’s dog Tucker, above, has pet insurance through Zoetis’ Pumpkin unit.
Courtesy of Joseph Gio
“What is underappreciated and what really makes Zoetis attractive is the pipeline of innovation,” says Joseph Ghio, an equity analyst at Williams Jones Wealth Management, who has a position in Zoetis.
While many other animal health companies have been relying on price hikes for growth, Ghio points to Zoetis’ cutting-edge research, producing drugs like Simparica Trio, a triple combination product for parasite prevention introduced in 2020 that he calls a “game changer.” Its sales jumped 57% last year to $744 million.
Moreover, Zoetis’ canine monoclonal antibody osteoarthritis drug Librela, which has hit blockbuster status of $100 million in sales abroad, is expected to launch in the US later this year. A feline version, Solensia, was approved by the Food and Drug Administration in 2022 and brought in $30 million in revenue last year.
“That really gives Zoetis a unique organic volume growth story that other animal competitors don’t have,” Ghio says.
The fact that their $100 million animal-health drug is enough to qualify as a blockbuster discourages Zoetis’ Big Pharma rivals, which are used to human drugs worth $1 billion or more, from entering the industry. Yet with so many animal medications paid for out of pocket, there’s no insurance company pressing patients to switch to cheaper generics when Zoetis’ drugs lose patent protection. As recently as 2019, close to 75% of its revenue came from products without patent protection.
Indeed, rising protein prices have done little to dent global appetites for meat, and millennials and Gen Z are spending more to indulge their pets. Zoetis poll found younger “pet parents” would be loath to cut their spending on their fur babies even if their income sank as much as 20%.
The company’s pet insurance unit, Pumpkin, also encourages pet owners to get more preventative care—improving their health and the sale of Zoetis products like vaccines.
Ghio’s dog Tucker is a Pumpkin client, and the insurance, he says, has “really helped us feel more confident taking him to the vet.”
Shareholders can similarly rest easy.
write to Teresa Rivas at [email protected]