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How This Animal Health Company Was Disrupted by the Coronavirus

By Luis Sanchez CFA - Sep 1, 2020 at 8:10AM

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Food supply chains were disturbed by the pandemic, but Zoetis is confident looking into the future.

The COVID-19 pandemic has disrupted many aspects of life, and one of the most surprising may have been the food and agricultural supply chain. With restaurants shut down and no market to serve, farmers literally poured milk into rivers and discarded tons of otherwise good food.

As a supplier to the food industry, Zoetis Inc. (ZTS -0.97%) felt the heat from these disturbances. Zoetis is an animal health company that sells medicine, vaccines, and diagnostics for domestic pets and livestock animals. Because of uncertainty stemming from the pandemic, many farmers stopped investing in their livestock and crops and therefore purchased less from Zoetis. This resulted in a rough patch for the company and its financial results.

a brown cow in a pasture

Image Source: getty images.

How COVID-19 disrupted the food supply chain

Lockdowns and social distancing guidelines around the world have disproportionately affected the food industry. Pre-pandemic, as much as half of all food spending happened at restaurants. Many farmers built their businesses to focus on the restaurant supply chain, which is distinct and separate from the grocery-store supply chain.

But when coronavirus hit, spending quickly shifted away from restaurants and toward grocery stores, many of which had to ration the sales of certain food items because of the increased demand. The rapid shift left many farmers with no way to sell their livestock and produce. Many food processing plants were shut down and couldn't take supplies, and others were operational but had no one to buy their products. Given few other options, many farmers resorted to simply throwing away their goods.

Because Zoetis sells many pet-health products into the livestock market, farmers shutting down production meant the company saw a decrease in demand. Zoetis predicts that U.S. livestock will continue to be affected by COVID-19 for the rest of the year.

How the food disruption impacts Zoetis

Despite the challenging business environment, Zoetis delivered stronger-than-expected financial results. This is largely thanks to the fact that it serves both the livestock and the pet industries. While livestock product sales suffered, pet-related medicine sales grew, likely because pet owners had more time to take care of their pets and take them to the vet. Veterinary hospitals are considered essential and have been open during the pandemic with curbside pickup and mobile clinic services.

Financial Metrics Q2 2020 Q2 2019 Year-Over-Year Change %
Total revenue $1,548 million $1,547 million 0%
Pet product revenue $882 million $798 million 11%
Livestock product revenue $649 million $724 million (10%)
Net income $377 million $371 million 1%

Data Source: Zoetis Financial Statements

Overall, the company's revenue was flat. However, this is a good result given the weakness in the livestock business line, showing how the company's diversification gives it strength. Zoetis saw its pet-product revenue rise 11% compared to the previous year, while livestock-product revenue fell 10%.

Although the economy is still suffering from the effects of the pandemic, Zoetis gave fairly upbeat financial guidance. Management believes pet-product sales should continue to perform well and that while livestock-product sales will be affected for the remainder of 2020, they should stage a comeback in 2021 as people return to restaurants.

Long-term growth from animals, both friendly and yummy

Despite short-term headwinds in the food supply chain, the long-term growth forecast for Zoetis is bright, particularly in pet products. According to the American Pet Products Association (APPA), $74.5 billion was spent on U.S. pets in 2019, and that number has grown every year for at least 25 years. Pet owners increasingly see their pets as members of the family and are willing to spend on expensive healthcare treatments and medicines when their furry friends are sick.

And after the pandemic is over, the livestock business should rebound, too. People will eventually come back to restaurants, and they will order food that was treated with Zoetis products. In addition, protein consumption per capita is on the rise, which benefits Zoetis's livestock business.

Luis Sanchez CFA owns shares of Zoetis. The Motley Fool owns shares of Zoetis. The Motley Fool has a disclosure policy.

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