Our "Pet Biotech" Stock Is Surging
Zoetis Helped My Pets ... And It's a Market Leader in the Western World
In the 6½ months since I told you about Zoetis Inc. ZTS 0.00%↑, shares of the “Pet Biotech” have risen more than 15%.
That’s roughly equal to a 28% gain on an annualized basis.
And there’s more.
All three of our pets – our Border Collie Chase, bunny rabbit Houston and kitten Ravioli — have been to the vet at least once for illness or a routine follow-up. And all three of them have ended up getting at least one Zoetis-made drug.
CNBC’s Jim Cramer – when asked about stocks to buy for the fourth quarter — ranked Zoetis as the No. 4 play … and said he “likes it very much.”
The newsletter Simply Wall Street said the company’s “intrinsic value” is potentially $249 – nearly 30% above its recent trading price of $192.
And third-quarter earnings will be released first thing in the morning on Monday, Nov. 4.
In short, Zoetis has done well since I brought it to you back at the start of April. And the developments I’ve seen since affirmed our view that this is a company that long-term investors can “Accumulate.”
Let’s start with the quick return …
BUY WHAT YOU KNOW
Look, I love making money as much as anyone (and probably more than many … lol). And this stock has certainly delivered.
The gain is absolutely due, in part, to the good fortune of fortuitous timing — a fancy way of saying “I got lucky” … in the near-term.
But that near-term “luck” was augmented by two pieces of the Stock Picker’s Corner (SPC )“Be a Wealth Builder” strategy — which boosted our odds of success.
We “found a great storyline” – in this case, the “New Biotech.”
And then we found a great stock — Zoetis.
It’s a company I’ve been following for a long time. And I found it because I subscribed to the foundational bit of wisdom offered by investing legend Peter Lynch — who always told folks to “invest in what you know.”
That’s what I’m talking about with Zoetis.
At the time we adopted Chase, I’d already put the stock on my “Buy” list.
And then I became a loyal Zoetis customer.
When Chase joined the Patalon household, we already had a bunny rabbit named Houston (the latest in a series of rabbits going all the way back to 1998). And we’d soon adopted a neighborhood cat Oreo (aka “Kitty”).
All three — Chase, Houston and Oreo had the same “paint job” — meaning all three were black and white in color. And all three would end up using (and benefitting from) Zoetis drugs.
We had to use several medications to treat the maladies Chase picked up on the street, in the kennel and in foster care. And others to keep him healthy. And we’ve used one or two others in the years since. Most were Zoetis therapies, including:
Cefpodoxime, an antibiotic the vet gave us to treat his surgical wound from being fixed.
Apoquel, a monoclonal antibody that treats dermatitis and other allergy-related maladies.
Simparica Trio, for protection against heartworm disease, ticks and fleas, roundworms and hookworms.
Synotic Otic, for treating ear infections.
And Cerenia, to counteract car sickness until he got a bit more used to vehicle travel.
Turns out, we weren’t done. We ended up using RevolutionPlus, a parasite-protection medication, on Oreo. And another Zoetis-made drug on Houston. And still others on Oreo, who we lost a few years back, and Ravioli, the brown kitten (pictured) that we adopted from the local Human Society a few months later.
No surprise that the $88 billion (market value) Zoetis holds the No. 1 market share spot in the pet pharmaceuticals market — both here in America and globally. It’s a market that’s projected to grow from $15.35 billion in 2022 to $23 billion in 2028.
Some analysts are forecasting a jump to $30 billion by 2030.
WHY ZOETIS IS FOR WEALTH BUILDERS
Zoetis shares have generated a total return of more than 500% since its 2013 spinoff from Pfizer Corp. PFE 0.00%↑. When I talked about Zoetis here in April, it was at $164 — down about 18% from its 52-week high. It closed at $167 the day before I first featured it.
Right now, Wall Street sell-siders have 14 “Buys” and no “Holds” or “Sells” on Zoetis. And they have a $219 target price on the stock — with a Wall Street high estimate of $248. Simply Wall Street says the intrinsic value is as high as $249.42 — nearly 30% above its trading price of roughly $192.
I actually like it longer-term — as one of those Wealth Builder stocks we look for.
And the numbers support that view.
With its drugs, vaccines, diagnostic offerings and medicated additives for feed, Zoetis can serve both pets and livestock with 300 product lines. I talk all the time about the importance of “blockbuster” drugs in biotech. Zoetis has 15 of them — each generating more than $100 million a year.
But Zoetis will keep growing — it will continue to gain market share through its current offerings and will also build a lead in a hot new segment for pet arthritis (which I’ll talk more about in a minute).
Here’s how the company’s business breaks down:
The U.S. market (53% of sales last year): Dogs like Chase and cats like Oreo and Ravioli accounted for 73% of sales. The rest is cattle (16%), horses (4%), poultry (4%) and swine (3%).
The overseas market (46% of revenue): Outside U.S. borders, we’re talking about dogs and cats equal (49%) of revenue, cattle (20%), swine (11%), poultry (9%), fish (6%), horses (3%) and sheep (2%).
On an overall basis, Zoetis is No. 1 in North America, Latin America and Asia. And it’s No. 2 in both Eastern and Western Europe.
But the stock market is a “what-comes-next” playground. And for Zoetis, the “what comes next” is a promising drug.
EASE THEIR PAIN
Zoetis received the first U.S. Food and Drug Administration (FDA) approval for its monoclonal antibody drugs to treat osteoarthritis (OA) in cats (2022) and dogs (2023). This is a significant step-change over giving nonsteroidal anti-inflammatory drugs (NSAIDs, or ibuprofen, to you and me) to pets.
These new treatments — Solensia for cats and Librela for dogs — could eliminate a lot of pain felt by our furry friends.
Here in the U.S. market, maybe 40% of dogs and cats suffer from some degree of OA — and the pain it creates. But because NSAIDs can cause stomach problems and kidney or liver damage — and because there are only a couple that are FDA-approved for animals – many of our furry friends can go untreated.
Zoetis execs have told investors these new drugs should grow to peak sales of more than $1 billion – joining its skin and parasite therapies as $1 billion-a-year blockbusters.
The company also says the renal, cardiology and oncology markets for pets will triple in size by 2032, meaning there are three other pathways for its scientists to pursue.
INFLATION … IT’S NOT JUST FOR HUMANS
Given what we’ve been looking at here, it’s not a surprise that pet ownership can get expensive. And those new technologies figure to make it even more so.
More than a quarter (26%) of Americans surveyed by USA Today in February said they spend $51 to $100 a month on their dog. An equal number (26%) spend between $101 and $250 per month on dog care, the survey found.
It’s another inflationary assault, says a new report from the U.S. Bureau of Labor Statistics (BLS), which finds that pet-related expenses are grabbing an increasing slice of consumer budgets. Those outlays have surged nearly 78% — growing from $57.8 billion in 2013 to $102.8 billion in 2021. During that same stretch, yearly incomes have increased about 46%.
Zoetis has an answer for that, too.
In 2020, Zoetis launched Pumpkin Insurance Services Inc., a preventive care and pet insurer that’s grown and now provides coverage to more than 65,000 U.S. pets. In a review last year, MarketWatch said Pumpkin “makes good on its promise to provide comprehensive care.”
Pumpkin offers accident-and-illness insurance plans. And it works with veterinarians to create an array of “wellness” offerings to keep dogs and cats healthy – treating them for hereditary conditions, behavioral problems, dental illnesses, sick visit exams, pet ER visits — and even alternative treatments like acupuncture.
Last May, Zoetis sold a majority stake in Pumpkin to JAB Holding Co., a brand-investment company that has invested in various companies throughout its history like Keurig Dr. Pepper Inc., Krispy Kreme Inc., Panera Brands Inc., Caribou CoffeeEinstein Bros. Bagels and Bally.
I love this deal for Zoetis.
JAB’s pet insurance ventures have more than 3.3 million pets enrolled. But Zoetis is keeping a minority stake and a “commercial partnership” in the venture. The combined partnership has “scale.” And it gives Zoetis an inside track on prescriptions since the insurers can decide which drugs will get “coverage” and reimbursements.
TELLING FIGURES
The Zoetis story is strong.
So are its numbers.
According to Zacks Investment Research, the consensus EPS forecast for the quarter is $1.46. The reported EPS for the same quarter last year was $1.36.
The company is projected to bring in revenue of $2.31 billion (range of $2.29 billion to $2.34 billion) — up from $2.19 billion a year ago. Zoetis has beaten its top-line revenue estimate in three of the last four quarters.
Profits are projected at $1.49 a share, with a range of $1.46 to $1.56.
It beat estimates in three of the last four quarters – a rate of 75% … well above its peer average of 57.28%.
And there’s room for more.
Take Zoetis’ return on invested capital (ROIC) – a measure of how well its capital is being used to generate profits. For Zoetis, the ROIC is 20%, which makes it a top-quintile S&P 500 company. Over the last 20 years, companies in the top fifth of this metric, as a group, are big outperformers.
Zoetis also boasts a net profit margin of 27%. And it has a shareholder focus. Over the past 10 years, the company has repurchased about 1% of its shares a year. And it’s boosted its dividend.
The company right now pays $1.73 a share in dividends – for a yield of not quite 1%.
Chase, Houston and Ravioli are happy it’s around.
And so are we.
See you next time.
