JHVEPhotoZoetis Is The Animal Healthcare Leader Zoetis Inc. (NYSE:ZTS) is a fundamentally strong healthcare company focusing primarily on animal health. Zoetis has a long history of delivering on its value proposition “by advancing care for animals.” As a result, it has propelled ZTS into one of the world’s leaders in animal health, capitalizing on its massive global scale and R&D expertise. Moreover, a relatively more fragmented market (as compared to the human health business) has also afforded Zoetis sector-leading profitability and assigned a best-in-class “A+” profitability grade. ZTS’s price action has been consistently bullish, delivering a 10Y total return of almost 500%, easily outperforming the S&P 500 (SP500). However, with ZTS stock stuttering with an underwhelming 1Y total return of just 10%, is it time for dip-buyers to pounce? Zoetis’s approach to animal care (Zoetis filings) Zoetis underscores its integrated approach to animal care, allowing the company to capture significant opportunities across different markets and verticals. Consequently, Zoetis’s business operations involve “building a diverse and durable portfolio” divided into the Companion Animal and Livestock segments. Zoetis revenue segments (FinChat) As seen above, Zoetis’s Companion Animal segment is the company’s key revenue driver. Despite that, Livestock remains a core earnings driver, although it has suffered from more challenging YoY comps and macro headwinds attributed to China (weak economy) and Argentina (hyper-inflation). As a result, I assess that growth investors will likely focus their attention on Zoetis’s Companion Animal business, given the need for ZTS to justify its growth valuation over its peers in the healthcare sector. Zoetis’s Raised Guidance Debunks Fears Zoetis Q1 earnings release key takeaways (Zoetis filings)Zoetis is confident in its most important revenue growth driver, which recorded 20% YoY operational growth in the first quarter. Consequently, it also provided confidence for Zoetis to raise guidance for FY2024, underscoring the resilience of its animal care business. Furthermore, the negative media publicity that caused a plunge in ZTS stock in April hasn’t impacted the scaling opportunities for Zoetis’s Librela and Solensia. As a reminder, the Wall Street Journal reported on the concerns raised by some pet owners. These owners “attribute their illnesses and deaths to the arthritis drugs Librela and Solensia.” However, the company indicated that just 1% of the 18M shots administered globally had reported side effects. In addition, Zoetis CEO Kristin Peck emphasized that possible complications involving comorbidities “may have contributed to the initial negative reactions.” Furthermore, Peck quickly telegraphed that its monoclonal antibodies have received the “overwhelming satisfaction of the vast majority” of its users. Therefore, the negative feedback reported by the WSJ could have been overstated. As a result, Zoetis remains steadfast in its belief that Librela and Solensia are on track to achieve combined peak sales of $1B globally. CFO Wetteny Joseph laid out a three to five-year timeline for Zoetis to meet its growth projections. Joseph also indicated the potential for significant market share gains outside of the US, anticipating Librela to become the “first line of treatment” for veterinarians managing animal pain management cases. ZTS Stock Is Not Cheap ZTS Quant Grades (Seeking Alpha)With ZTS valued at a significant growth premium (“F” valuation grade), Zoetis must continue outperforming its guidance. However, I gleaned some concerns as Wall Street downgraded ZTS’s estimates, intensifying Zoetis’s execution risks. Despite that, ZTS has a highly robust business model bolstered by substantial profitability. Zoetis is estimated to post an adjusted EBITDA margin of 43.4% in FY2024, just below last year’s 43.6% metric. Therefore, buying sentiment on ZTS is expected to remain robust, although concerns relating to Librela and Solensia could persist for now. Is ZTS Stock A Buy, Sell, Or Hold? ZTS price chart (monthly, long-term, adjusted for dividends) (TradingView)ZTS’s price action underscores my conviction about its long-term uptrend bias. ZTS has recovered fully from the selloff in April when the WSJ report was released. ZTS’s price action also demonstrates an astute bear trap (false downside breakdown) in April, suggesting dip-buyers bought the selloff aggressively. With ZTS’s buying momentum still solid (“B-” momentum grade), I assess a further recovery could be in store. Notwithstanding my optimism, ZTS has a critical resistance zone at the $200 level, rejecting buying advances over the past year. For now, investors looking to buy more shares should avoid adding too close to that level. In addition, ZTS’s substantial premium over its healthcare peers could intensify potential risks of a steeper selloff if the fallout from the WSJ report worsens. However, I assess the market seems satisfied with Zoetis’s assurances and confidence. Furthermore, Zoetis’s Q1 earnings release corroborated management’s confidence. Consequently, it provided a firm foundation for bullish ZTS investors to debunk the market’s initial pessimism. With ZTS continuing its upward recovery, I assess a buying opportunity for ZTS as appropriate at the current levels. Rating: Initiate Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified. I Want To Hear From You Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
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