Zoetis (ZTS -1.87%) stock has more than doubled since the animal-health company was spun off from Pfizer in 2013. Roughly half of those gains have come in just the last 12 months.
So far, 2017 is turning out to be the best year yet for Zoetis. The stock just hit yet another all-time high. Here are three key reasons Zoetis stock should go even higher.
There are two major demographic trends working in Zoetis' favor. First, the world's population is increasing. The United Nations projects there could be an additional 1 billion people on the planet by 2030. Second, large developing nations such as China and India have a rapidly growing number of residents in the middle class.
How do these trends directly benefit Zoetis? The increase in global population will drive greater consumption of animal proteins. That means higher demand for the anti-infectives, medicated feed additives, and other products that Zoetis supplies to the livestock industry.
The growing middle class in countries across the world impacts Zoetis in two ways. These individuals will be more likely to consume animal proteins, whether it be pork, poultry, beef, or fish, as their income levels rise. They also will be more likely to own pets and be able to afford better care for those pets. That should generate growth for Zoetis' companion-animal business, which markets pet supplies, veterinary supplies, medicines, and parasiticides.
Zoetis invested roughly $370 million in research and development in 2016. The company racked up more than 170 product approvals during the year. Zoetis also invests in life-cycle innovation to bolster its established products. This is especially important, since the average lifespan of the company's top 24 products is around 30 years.
One particularly notable area of focus for Zoetis' research and development team is in monoclonal antibodies. In December, the company won a license from the U.S. Department of Agriculture for Cytopoint, the first monoclonal antibody approved to help treat atopic dermatitis in dogs.
Continued innovation should enable Zoetis to effectively compete against top animal-health companies Merck (MRK -0.50%) and Elanco, a division of Lilly (LLY 2.53%). Merck and Lilly are neck-and-neck in the race to be the No. 2 animal-health business in the world after Zoetis.
While Merck, Lilly, and privately held Boehringer Ingelheim beat Zoetis in some specific markets, the company is in great shape overall. Zoetis ranks first in market position in both North America and Latin America. It comes in second in the growing Asian market.
Zoetis has made several key acquisitions in recent years. In 2015, the company bought Pharmaq, a deal that is helping Zoetis gain ground in the fish-vaccines market. Last year, Zoetis acquired Danish lab-technology manufacturer Scandinavian Micro Biodevices, which expanded its diagnostic-analysis lineup. More recently, the company announced in April that it plans to acquire monoclonal antibody therapies specialist Nexvet Biopharma PLC.
These acquisitions are a key part of Zoetis' growth strategy. The Nexvet acquisition, for example, will expand Zoetis' pipeline of treatments for chronic pain management in dogs and cats. This market is estimated to be valued at around $400 million annually.
Earlier this year, CEO Juan Ramon Alaix said that mergers and acquisitions was the company's second priority after optimal allocation of capital to its internal efforts. Alaix stated that Zoetis will be on the lookout for opportunities in its core business with a special focus on local companies in emerging markets. He also indicated that Zoetis will potentially be interested in expanding into complementary markets through acquisitions.
There are risks that could threaten Zoetis' tremendous momentum: Merck, Lilly, and Boehringer Ingelheim could make it difficult for the company to capture more market share. The Nexvet acquisition might not generate the expected benefits. Zoetis could run into problems getting new products approved.
It's also possible that everything goes right from a business standpoint, but investors sell off because they think the stock is too expensive. Zoetis shares trade at more than 23 times expected earnings, which isn't a cheap valuation. The stock, though, is considered somewhat recession-proof, a quality that justifies a premium to some extent.
However, I think that the company's growth prospects stemming from demographic trends, innovation, and acquisitions outweigh the risks. Barring a major overall stock market decline, Zoetis stock appears likely to set even more all-time highs.