With the U.S. stock market butting against record highs, valuations certainly deserve a closer look. One company that may survive such scrutiny is Zoetis (ZTS +0.85%).
Zoetis specializes in making pharmaceuticals for livestock animals and pets. While the company may not be a household name among investors like Pfizer, Zoetis has been a great stock to own over the long term and has continued to report strong financial results throughout the COVID-19 pandemic.
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Zoetis's record 2020
2020 was a fantastic year for Zoetis. Earnings were up due to excellent performance in its companion animal segment (companion animals include dogs, cats, and horses). While the livestock segment was flat for the year, sales in the companion animal division were up 17% thanks to the launch of a new product, Simparica Trio, and gains in the company's dermatology portfolio.
Simparica Trio is a parasiticide for companion animals to prevent heartworm, ticks, fleas, roundworms, and hookworms. What makes Simparica Trio special is that it is the first "triple threat" parasiticide on the market that combats all the major parasites at the same time. The new drug added $150 million of incremental sales in 2020.
Another part of the company's portfolio that outperformed was dermatology. Revenues increased more than $170 million versus the prior year, thanks in part to continued performance from Apoquel and Cytopoint, both of which benefited from pet owners being more attuned to their pets' behavior while stuck at home.
Zoetis's livestock segment had a very challenging year due to the pandemic, which caused a massive contraction in livestock demand across the globe. However, China helped mitigate some of these headwinds with significant revenue contributions in an effort to replenish the still-weakened herds caused by an outbreak of African Swine Flu in 2019.
Attractive long-term growth
Zoetis is expected to carry its momentum into the new year. The company provided financial guidance for revenue to grow 9% to 11% in 2021, driven by continued performance in the companion animal segment, new product launches, and increased demand for livestock-related products during the economic reopening.
The companion animal segment has driven most of the company's growth, with new product launches as a highlight. Zoetis has one of the most robust development pipelines in the industry. For example, management has high hopes for Librela and Solensia (osteoarthritis drugs for dogs and cats), which are expected to be released during the first half of 2021.
What is unique about these pharmaceuticals is that they use monoclonal antibodies to provide effective pain relief and joint mobility, with minimal kidney and liver involvement. This is truly groundbreaking for the veterinary industry at large and is difficult for competitors to replicate.
Companion animal diagnostics is another interesting growth area for the company. When Zoetis acquired Abaxis in 2019, it gained access to a suite of testing equipment and kits that allowed the company to enter the highly lucrative diagnostics space. Zoetis intends to continue growing in the pet diagnostics space through mergers and acquisitions, so investors should keep an eye on what the company acquires in the future.
Zoetis is fortunate to be built on strong fundamental trends. An ever-increasing number of families are adopting pets, and they're finding medical care for them at increasing rates. And the livestock division is expected to sustain its mid-single-digit growth as emerging economies consume more protein and farmers shift to work more sustainably.
Valuation too high?
With a current price-to-earnings (P/E) ratio above 40, Zoetis's stock doesn't scream "cheap." However, Zoetis is a high-quality business with a position in the attractive market for animal healthcare. Investors are paying a high multiple in expectation of continued growth.
If you compare Zoetis to human-oriented pharma peers, the stock looks expensive. Pfizer carries a P/E ratio of 20, and Eli Lilly trades for 30 times earnings.
However, if you compare Zoetis to other pet companies, the valuation appears to be more reasonable. Idexx Labs, a veterinary diagnostics company, trades for 73 times earnings, while pet food company Chewy is unprofitable and trades for 6.4 times its price-to-sales -- compared with Zoetis's price-to-sales multiple of 10.
An attractive growth story
Clearly, Zoetis is running red-hot right now. The challenges of 2020 proved that Zoetis can rise to the occasion, and management has clearly been forward-looking -- new product launches, an expansive global presence, diagnostics penetration, and much, much more all paint the picture of a company that truly understands its business.
Zoetis has provided excellent returns for investors and only seems to grow in potential. Its top-tier pipeline and robust portfolio look poised to dominate the market for years to come. Investors keen to join in on animal health would be wise to take a look at Zoetis.
