Is Your Pet's Health a Good Investment?

In February, Pfizer spun its animal health division into a separate company and gave it a jazzy new name, Zoetis (NYSE: ZTS  ) . The news shook up the stock market, as Zoetis's IPO was the largest since Facebook's, and the situation raised an intriguing question to Wall Street: Sure, you can invest in your own health care, but what about Fluffy's? Now that it's been more than six months since it went public, it's time to give Zoetis a checkup and see how it fares as an investment opportunity.

Healthy vital signs
Zoetis makes and distributes medicines for pets and livestock. In 2012, it brought in $4.3 billion, had 19.5% market share, and achieved a 57% boost from its $2.7 billion revenue in 2009. The company targets a sector of the animal health industry that is currently worth $22 billion, and has a lot of room to grow. Its researchers expect the animal medicines and vaccines industry to rise at an expected rate of 5.7% a year until 2015.

Livestock's trump card
One potential reason for Wall Street's confidence could be Zoetis' particular prominence in the livestock medicinal industry, which tends to experience less generic competition than its pet care division. It made $2.8 billion last year (up from $2.7 billion in 2011). Its top seller last year was the Ceftiofur line of antibiotics for cattle, poultry, and swine, which brought in 7% of its total revenue. According to Zoetis' most recent 10-K, demand for its livestock product has increased because of growth in the cattle market as well as new FDA approvals for treatments.

Throw in $1.5 billion for pet medications (up from last year's $1.4 billion) and you've got a solid one-two punch of a revenue stream. Zoetis credited the success of its "companion animal" products to sales of its anti-inflammatory Rimadyl and anti-infective Convenia and a number of canine respiratory vaccines. Both these earnings venues tap into a promising market that shows no foreseeable signs of slowing, but also one that doesn't appear close to being saturated. Proper care for pets and livestock appears to be recession-proof. Even when the economy is bad, pet owners still want what's best for their animals and meat eaters want what's healthiest for their soon-to-be poultry, pork, and beef.

What needs a second glance
So far, Zoetis' performance looks pretty good, but no business is without its dark spots. As of June 24, Pfizer has completely let go of its hold on the company's shares, and while "the separation" birthed Zoetis' presence as a public stock, it might also come around to plague the company later.

Now that Zoetis is no longer attached to Pfizer, it could lose the part of its customer base that relied on buying from a familiar brand name. Pfizer could also acquire another animal health business and thus act as a direct competitor to the very company it created. Still, animal antibiotics aren't exactly like Tylenol: Vets and livestock farmers (Zoetis' primary customers) are less inclined to mindlessly reach for a remedy just because of its name, and are more apt to do their homework and look for a product with a track record of effectiveness. If Zoetis can establish a reliable reputation with these customers now, they could remain faithful to its product line later on.

So is it worth it?
There's a lot of money in this particular sector of the animal health market, and as the only pure-play animal health company on Wall Street, Zoetis has the potential to see steady, solid growth as its industry continues to expand. However, for would-be investors who are squeamish about how the company's performance might change post Pfizer split, there's no harm in waiting another quarter or two and seeing how it fares before deciding whether or not to buy.

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