Zoetis is an expensive stock, this advisor says

If you’re cruising for a COVID-19 play in the healthcare space, animal pharma giant Zoetis (Zoetis Stock Quote, Chart, News, Analysts, Financials NYSE:ZTS) might be on your radar, what with the stock gaining a relatively modest 25 per cent last year and the company now reporting stronger earnings. But Stan Wong of Scotia Wealth Management is advising investors to hold off for the time being, as the stock has run up enough.

“Zoetis is a name that we used to hold. We took profits on it probably about a year, nine months ago,” said Wong, director of wealth management at Scotia, who spoke on BNN Bloomberg on Thursday.

A former subsidiary of Pfizer, New Jersey-headquartered Zoetis specializes in animal health under two segments, pets and livestock, with business in the US and worldwide. The company hit $6.7 billion in revenue last year, has about 300 product lines and sells to 45 countries globally. (All figures in US dollars.)

As for many companies, 2020 was a bit of a challenge with US business taking a bit hit during the pandemic, but Zoetis seemed to have picked up the pace over the tail end of the year, reporting revenue growth of 13 per cent year-over-year for its third quarter 2020 and then last week coming in with eight-per-cent growth for the company’s fourth quarter.

For the full 2020, revenue grew by seven per cent from 2019 while net income rose by nine per cent to $1.636 billion and EPS landed at $3.42 per share compared to $3.11 per share a year earlier. Meanwhile, management has guided for 2021 revenue between $7.4 and $7.55 billion and EPS between $4.36 and $4.46 per share.

“We believe [2020’s] momentum sets us up for a strong 2021, even amidst ongoing COVID-19 uncertainty,” said CEO Kristin Peck in the fourth quarter press release.

“We expect to continue growing revenue faster than the market in 2021 driven by continued strength in pet care; ongoing expansion in markets outside the U.S., most notably China; and acceleration of our diagnostics portfolio penetration. As a result, we are guiding to full-year operational growth of nine per cent to 11 per cent in revenue,” said Peck.

But while Zoetis managed a good return in 2020, the stock was pretty well flat from August onward. So far in 2021, ZTS is down five per cent.

Wong says secular tailwinds make his long-term take on Zoetis better than his near-term.

“[Zoetis] makes a lot of sense long term because during the pandemic people are buying pets to have more company in the house and so forth and, long term, companion pets continue to be a part of the family and people will spend what they need to spend to help their friends,” Wong said.

“In the livestock space, when you look at what’s happening in the emerging markets as incomes and disposable income continues to grow, there’s more need for protein in people’s diets in the emerging markets, so long term I think this name makes a lot of sense,” Wong said.

“The only thing that I would say about this particular stock at this point is that the valuation is getting a little bit heavy at 36x forward earnings. We see a growth rate on the EPS side of about 11 or 12 per cent, so it’s a good growth rate but the P/E on a forward basis is a bit expensive for me,” Wong said.

Pet adoptions in the US reportedly rose by 15 per cent in 2020, while the American Pet Products Association has said the American spend on pets rose six per cent in 2019 over 2018 to $95.7 billion, as quoted by CNBC.

Peck said the stay-at-home economy has meant not just more animals per household but better care of them, as owners are around the home more and are identifying health issues more readily.

“They’re noticing more and those pets are getting taken care of much better than ever before,” Peck said in a CNBC interview in January. “They’re noticing that itching or the need for preventatives, so it has been a real strong growth driver for the industry overall.”

Wong said there has been movement in the healthcare space away from more well-known pharma names like Zoetis and into biotech stocks, making for less gains.

“Especially given what’s happened with the vaccine space and so on, names like Zoetis and some of the old-type of pharmacare names have not done as well,” Wong said.

“With that being said, I think valuation keeps me away from this particular name right now. I look for valuation to come down a little bit before buying in again,” Wong said. “Long term, I think there’s good secular growth in this particular name but right now I’d probably be on the sidelines.”