Zoetis is an excellent stock to own now, this investor says

Animal pharma giant Zoetis (Zoetis Stock Quote, Chart, News NYSE:ZTS) has been a strong performer for a long time, and with people buying more pets during the pandemic, investors have taken to the stock this year, too. But the case for Zoetis goes well beyond being COVID-19-friendly, says Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, who argues that the business is a money-maker.

Zoetis has had a positive year so far, with its share price up 21 per cent year-to-date and management predicting strong earnings growth for the full 2020. Zoetis, which splits its business roughly down the middle between livestock and pet drugs, covering vaccines, parasiticides, dermatology and diagnostics, has faced headwinds on the livestock side in 2020, with disruptions in global food supply factoring in. But its companion animal should see a boost by year’s end, according to management.

“As an essential business supporting the global food supply and the care of people’s pets during the pandemic, Zoetis demonstrated greater resiliency than expected in the second quarter, with four-per-cent operational growth in revenue and four-per-cent operational growth in adjusted net income,” said CEO Kristin Peck in an August press release.

Ahead of third quarter results due on November 5, Zoetis beat consensus estimates for top and bottom lines in its second quarter, coming in with $1.5 billion in revenue (even compared to a year earlier) but better than analysts’ forecast of $1.4 billion. Adjusted earnings $427 million or $0.89 per share were lower than last year’s $436 million but still beat the Street’s $0.64 per share.

“They’ve executed incredibly well. I think that if you get a pullback you should buy the stock. The pet business will continue to grow, especially in Asia, so I think that they have a really great opportunity, actually,” Harris said.

Even better was the company’s guidance, which had been lowered after the first quarter but raised again after the Q2 and calling for 2020 revenue between $6.3 billion and $6.5 billion, up from the previous forecast for between $6.0 billion and $6.3 billion.

“Looking ahead, we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially parasiticides and our key dermatology portfolio, and we are raising our guidance to reflect our current outlook for
the year,” said Peck in the Q2 press release.

Harris said there a number of reasons investors should be thinking about buying Zoetis, especially on a pullback.”

“We’ve owned Zoetis for a while now. If you looked at what’s happened with COVID, a lot more people have either adopted pets or bought pets [and] the cost of keeping an animal is gotten more expensive,” said Harris, speaking on BNN Bloomberg on Monday.

“They’ve executed incredibly well. I think that if you get a pullback you should buy the stock. The pet business will continue to grow, especially in Asia, so I think that they have a really great opportunity, actually,” Harris said.

Harris said the company’s got demographics on its side, too, where more people in younger generations are buying pets.

“The other thing that’s very important about [Zoetis] is that drugs are easier to do on the pet side. Number one, you use an existing molecule that humans use actually a lot of times and, number two, in the testing there aren’t a lot of generics. So, it really has better
pricing power,” Harris said. “I think it’s a great story.”

Count pet ownership as another pandemic trend.

The New York times reported recently that the ASPCA has seen in increase in fostered animals that has reached nearly 70 per cent over the same period last year. With so many more people at home, the paper reported, that means more time to care for a pet.

Best Friends Animal Society has also seen a surge in the number of fosters and adoptions nationwide, because sheltering in place has allowed people the time to tend to a new cat or dog.

“When the pandemic first hit, unprecedented numbers of people signed up to foster animals,” Julie Castle, the chief executive of Best Friends Animal Society told the Times. “Some shelters completely emptied their kennels for the first time ever. In the middle of a crisis, many groups saved more lives than they ever had before. As we start to open up our communities, there is no reason we cannot keep these positive gains we made during the pandemic. It’s a great time to adopt because you can really get to know the pets’ needs before returning to a more normal routine,” she added. “Many first time adopters who have been working from home with their new pets for the last few weeks have discovered the secret reality of what dogs and cats really do all day: They mostly sleep, with a bit of eating and playing mixed in.”