Is Zoetis Stock a Buy?

Price Target: $204 (25% upside)

Current Price: $165

Target Date: Q1 2024

Stock: Zoetis ($ZTS)

We talk a lot about the ongoing reshoring narrative at the center of our current market, but it's important for us to find companies and industries that will still grow internationally as we move toward the 2030s. 

One critical area that will still need global focus is industrialized agriculture -- particularly livestock.

Raising enough food animals to sustain a growing population results in situations where lots of animals can get sick and impact supply chains.

The egg crisis that briefly flared up earlier this year was the result of an Avian flu outbreak that minorly disrupted a few supply chains. 

Keeping our livestock healthy at scale is going to be absolutely critical moving forward.  

This is why we're revisiting one of our oldest picks: Zoetis ($ZTS).

Zoetis has managed to diversify its holdings and establish enough international growth to establish itself as a global leader in animal health. Their pharmaceuticals are driving revenue and margin growth despite significant supply chain difficulties and foreign-exchange pressures. 

Essentially, we're reporting on Zoetis at a critical moment where they pass through the inflection point necessary to ensure global growth in a rapidly de-globalizing world.

While there have been supply-side challenges for Zoetis, they have demonstrated that they can maintain margins while increasing revenue. 

So let's take a quick look at how Zoetis is establishing a global animal health empire. 

Our animal life is just as critical as human life in this economy. Let's check out the details👇 

Zoetis 2023 Overview:

So, to make this quick: Zoetis is a pharmaceutical provider focused on animals. They have two major sides to their business: Companion Animals (pets) and Livestock (food). 

Like any pharma play, Zoetis's business model relies on ebbs and flows of patents as the company develops new treatments for diseases.

As such, their biggest vertical is currently companion animals. Turns out there's a lot of money to be made in making sure that America's pets have healthier, more comfortable lives. 

Right now Zoetis is soaring on the success of their line of parasiticides. That is treatments that kill parasites. 

Development-wise, there's a lot of crossover at Zoetis as most livestock and pets are mammals and share a lot of similar health needs and biochemistry.

Because of this, a lot of Zoetis's anti-parasite medication came out of research for their livestock line. 

Their principal success has been with Simparica Trio, a broad parasiticide that, despite what the name suggests, takes care of about 6 different kinds of parasites and a whole host of diseases associated with them.

Financial Review:

On the back of Simparica, Zoetis managed to get revenue for their companion animal segment up 12% YoY in Q4 -- which is truly nuts at that scale. 

That's not the impressive part though.

Simparica is actually a little complicated to make and Zoetis experienced supply constraints throughout Q3 last year. Revenue going up despite those issues speaks to how strong a product Simparica is. 

Especially when you consider that Zoetis managed to grow that revenue and maintain margins for companion animals -- still topping 68% gross margins. 

With profitability like that, Zoetis has a lot of wiggle room to maintain R&D and keep growing its treatment base. 

Growth Plan:

For our part, we're really excited to see whole new treatment categories start to enter Zoetis's wheelhouse.

One huge technology that advanced a lot thanks to research during the height of the COVID pandemic was Monoclonal Antibody Treatments. 

Zoetis released its own Monoclonal Antibodies last year to help treat arthritis pain in Cats and Dogs.

This drug, Solensia, opens up a lot of new treatment paths for all sorts of complicated and hard-to-treat diseases.

It's essentially opening up a whole new vertical for Zoetis, and we're really excited to see how they grow it over the next year. 

Meanwhile, on the livestock side, Zoetis is simply holding steady while maintaining margins.

There has been a lot of foreign exchange and supply pressure on the company in the last year.

Our view is that this will improve as supply chains get sorted and currency pressures equalize as the US gets inflation under control. 

Zoetis Outlook:

At the end of the day, Zoetis is a play that will rely on easing supply pressures.

This is a company and stock thriving in a more difficult environment that will do even better as the macro situation improves. 

We really like their advancing technology and what looks to be high-margin treatments for the right areas.

Animal health can be kind of boring, but it's an essential part of our economy that will only have more spending added. 

We're really excited to see where they take this from here. 

Rating: Overweight

Market Cap: $76B

Dividend Yield: 0.91%

Risk/Reward: Medium / High