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Investors interested in the animal health industry have been keeping a close eye on Zoetis (NYSE: ZTS ) since it went public in February. A spinoff of Pfizer's animal health division, over the past few months Zoetis has essentially had to prove whether it can stand on its own and grow long-term as a lucrative business.
Zoetis shed a little more light on these questions during its latest quarterly earnings call, and while its business is by no means limping along, there are still some important investment factors to consider before diving into this stock.
Growing its brand
Revenue was certainly one of the most impressive stats on Zoetis' Q3 income statement last quarter, up 8% compared with the same time a year ago, to $1.1 billion. $706 million of that came from the company's Livestock segment, while the Companion Animal division brought in $397 million.
This quarter's revenue was especially significant, because, since Zoetis has barely been around for a year, its 2012 statistics are comprised from when the company was still a part of Pfizer. That this business can boost its quarterly revenue by 8% during its first year, completely as a standalone entity, is a promising sign.
Zoetis has also made a couple of important (albeit rather small) steps toward growing its company with new product offerings and strategic acquisitions. In October, Zoetis acquired all of the assets for specialty chemical company Advanced Food Technologies, which is known for both food safety and meat and poultry animal care products. Zoetis' CEO also hinted at 2014 plans to release a number of new drug offerings.
All those growth efforts, of course, come at a price. Even while its revenue rose, Zoetis' net profit dropped 19% this quarter, to $131 million. The costs for research and marketing can be astronomical for any pharmaceutical company, but Zoetis is under a particularly large microscope during its first year, and as one of the market's few pure-play animal health businesses.
Mounting competitive concerns
Zoetis may have impressed shareholders by growing earnings so significantly, and so soon. However, Wall Street still has one burning question for Zoetis, and Alaix's inability to clearly answer it may have contributed to the market's somewhat indifferent treatment of its stock following the Nov. 5 earnings call.
When the conference call opened the floor for general questions, one participant asked Alaix whether Zoetis was prepared for other pharmaceutical competitors to spin off their own animal businesses as a result of this company's success. It could be a very real possibility, since both Novartis AG (NYSE: NVS ) and Merck (NYSE: MRK ) have reportedly considered spinning off their own animal health segments as of late. One questioner even asked whether Zoetis would consider buying out one of these would-be companies.
Whether it's soon to happen or not, at the moment, Zoetis has a lead on Merck. That company's animal health division brought in only $800 million last quarter, compared with Zoetis' $1.1 billion, even with a more diversified product line (Merck also sells "aquaculture" pharmaceuticals, including parasiticides for salmon).
Novartis' situation is a little trickier to separate. This company clumps its animal health division with its over-the-counter products, creating an overall Consumer Health segment. Even with all those added branches, Novartis brought in only $1 billion last quarter in Consumer Health. Even though that was an 11% increase, Zoetis still had it beat, and with animal products alone.
Even though these conference-call questions were highly speculative, instead of directly answering either, Alaix stated that Zoetis was more focused on "delivering value to customers and shareholders" than preparing for these possibilities, and said that the realm of competition was "something we should not enter." Addressing a question honestly is one thing (even if it's an unfavorable one), but it seems in this case that Alaix avoided it entirely, which feels like a failed attempt to get investors to look the other way. Considering Zoetis is currently beating both of these divisions with its revenue, a conspicuous dodge seems especially unnecessary.
In Zoetis we trust?
While Alaix's snowball answer is not a huge warning sign for the short-term, a little transparency can go a long way for a Foolish investor. Even if the public competitive terrain is relatively clear for Zoetis right now, there's no telling how long that could last.
For the moment, however, the market's only pure-play animal health care business has proved it doesn't need Pfizer to generate sales and is also working to grow that brand even further. If it can keep these solid sales results going into Q4, with an uptick on the money it retains as profits, Zoetis could be a strong pick for the health care investor with a soft spot for pets.
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