What happened
Shares of Zoetis (ZTS 2.06%) were losing ground in 2022 as the pet pharmacist saw headwinds related to a slowdown in the pet sector. A compression in valuations in growth stocks due to rising interest rates also led investors to move money into bonds and safer stocks.
According to data from S&P Global Market Intelligence, the stock finished 2022 down 40%. As you can see from the chart below, Zoetis mostly tracked with the S&P 500 over the course of the year, though it fell at a steeper trajectory due to its higher valuation.
So what
Much of the pet products sector underperformed last year after booming during the pandemic as pet adoption and increased interest in pet spending spiked during the early months of Covid.
Zoetis delivered decent results in 2022, but growth was slower than investors were expecting.
In the third quarter, revenue increased just 1% to $2 billion, in part due to headwinds from a stronger dollar, and that result missed estimates at $2.08 billion. The company also reported declining earnings in Q3 with earnings per share (EPS) falling 3% to $1.13. It lowered its guidance for the year in the November report, calling for $8 billion to $8.075 billion in revenue, or just 3% growth, citing supply chain constraints, labor shortages, and the stronger dollar. It also cut its earnings guidance again, calling for adjusted EPS of $4.83 to $4.90, down from a previous range of $4.97 to $5.05
Despite sluggish growth on the top and bottom lines, Zoetis did give investors a reason to be encouraged at the end of the year, hiking its quarterly dividend 15% to $0.375 a share. CFO Wetteny Joseph said, "Zoetis has continued to perform well this year thanks to our diverse, durable product portfolio and global scale." He added that the company was well positioned to generate cash for future investment opportunities. Zoetis stock currently offers a 1% dividend yield.
Now what
Macroheadwinds appear to be building heading into 2023 as most economists expect a recession, but the good news for Zoetis is that the pet industry tends to be recession-proof as consumers need pet products, including medicine, regardless of the state of the broader economy.
The stock is still trading at a premium to the S&P 500 with a price-to-earnings ratio of 36, but its growth rate should improve once the challenges around supply chain and labor shortages fade.
