International efforts to thwart the coronavirus pandemic are expected to push the global economy into a recession. The world is going to look a lot different on the other side.
Demand for petroleum products has fallen at least 30% from pre-pandemic levels, while prices have also been pressured by a price war between Saudi Arabia and Russia. Many global supply chains are likely to leave China for good, especially as the country struggles to restart its factories. The European Union as an entity is unlikely to survive the fiscal catastrophe wrought by the pandemic. The United States won't be spared entirely, but capital flight to the world's largest consumer-driven economy -- backed by a relatively healthy demographic profile among industrialized nations -- is sure to cushion the blow.
While the worst is yet to come for the stock market (as earnings trickle in during the next two months) and the American economy (as government data are collected, compiled, and released in the time to come), investors with a long-term mindset can still find safe stocks to buy. For example, animal-health leader Zoetis (ZTS -0.62%) is relatively well-positioned to endure a prolonged period of uncertainty. Here's why the dividend stock is worth a closer look.
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An essential business for food production (and pets)
Zoetis has long been considered a recession-proof stock -- and that theory is about to be tested. The animal-health leader develops and sells products that keep livestock (poultry, swine, cattle, and fish) and companion animals (dogs, cats, and horses) healthy. From vaccines to medicated feed additives, dog dermatology products to animal health diagnostics, the company seemingly does it all.
Why might investors consider this a safe stock? Because every major government considers food production an essential economic function, which allows such companies to continue operating (with stricter health practices to protect employees) during the coronavirus pandemic. Food producers know that rearing healthy animals translates to healthy incomes, which means they won't skimp on vaccinations and other health-promoting products (regulations mean there's little wiggle room, anyway). That suggests the company won't see serious disruptions to demand for its livestock products, which were responsible for 48% of full-year 2019 revenue.
For now, there's nothing to indicate that investors should be worried about the companion animal segment, either. Many pets are considered family members, after all. It will be an important area for investors to watch: Products for cats and dogs alone were responsible for 47% of total revenue last year and are the highest-margin products sold by the company.
A safe stock, but there are still risks
Zoetis has yet to address the coronavirus pandemic and how it might affect operations, but that doesn't necessarily mean the business is completely immune.
On one hand, 12 of the company's 27 global manufacturing sites are located in the United States. Having manufacturing assets close to major markets -- half of full-year 2019 revenue was generated in the United States -- will be a notable benefit during this period of international uncertainty. On the other hand, many key components used to manufacture animal drug products are shipped in from all over the world, and it could take time to reconfigure supply chains if the health crisis drags on.
Similarly, depending on how badly the economy is disrupted from the coronavirus pandemic, it's possible pet owners could forgo or delay certain medications for their furry family members. That could hurt the company's highest-margin portfolio.
While investors need to be open to a range of possibilities for the global economy's near-term trajectory, Zoetis is relatively well-positioned in the grand scheme of things -- and that should help the stock outperform the broader market if worst-case economic scenarios become reality. The animal-health leader began the year with $1.9 billion in cash, and it has access to $1 billion in credit (which can be increased to $1.5 billion). The business generated $1.5 billion in net income in 2019, so it might be able to generate a profit in a severe economic downturn.
Zoetis has scheduled its first-quarter 2020 earnings conference call for May 6, which is when investors can expect an in-depth update on the company's forecast during the pandemic. For now, Zoetis should be considered a safe stock.
