Zoetis is my Top Pick, this investor says

If you’re going to buy one stock in a sector make it the big dog, says portfolio manager Paul MacDonald, and in the animal health sector that means Pfsizer spinoff Zoetis (Zoetis Stock Quote, Charts, News, Analysts, Financials NYSE:ZTS), the world’s largest provider of animal medicines and diagnostics. The stock has done well over the past couple of years but MacDonald thinks it still deserves a nomination as a Top Pick due to its superb growth prospects.

Zoetis, which has been dealing with a significant pullback so far this year, had registered more than a double from its early pandemic lows, going from about $100 per share in March of 2020 to just under $250 by the end of this past December. Since then the stock took a nosedive but ZTS seems to be settling now around the $200 mark, still a good return for long-term holders and likely a good buy for newcomers, says MacDonald, who sees continuing tailwinds in the pet health sector.

“Zoetis is the world’s largest animal health company and they’ve got two sides to their business,” said MacDonald, chief investment officer at Harvest Portfolios Group, who spoke on BNN Bloomberg on Thursday where he named ZTS one of his three picks for the year ahead. “One is your livestock business, so if you think about all the various types of antibiotics and testing, etc, they go into basically every type of livestock you can possibly imagine, all around the world.”

“That’s one side of the business [and] it’d be fairly low growth, fairly low margin compared to the pet health business, which is when you go into your veterinarian and you have to get a specific type of drug for your dog, for example,” he said. “I know in my house, Cooper ranks slightly above me in stature and so we treat these animals very much like humans, and so that’s an area that has seen tremendous growth.”

New Jersey-headquartered Zoetis is set to deliver its fourth quarter earnings next week, with the company looking to see results from a step-up in marketing to consumers in its pet medicine business. The difficult move has been to offer pharmaceuticals such as pet antibiotics and pain medications at a price that consumers will be willing to pay out of pocket while still generating a profit for the company.

“We’re investing a lot more in direct-to-consumer advertising in the US and markets around the world to build brand awareness with that pet owner so they know the value they’re getting when they invest in Zoetis products,” said CEO Kristin Peck in a CNBC spot in January. 

“It’s a self-pay market so as we’re developing products we have to be sure we can really provide an innovative product that meets a medical need and at a price point that makes sense for the pet owner. We’ve been able to bring quite disruptive innovation to the space,” Peck said.

By the numbers, Zoetis delivered revenue of $2.0 billion in its third quarter 2021, up 11 per cent year-over-year, and net income of $552 million or $1.16 per diluted share, which was up 16 per cent from a year earlier. Revenue split into $1.065 billion for the company’s US segment and $904 million for its international business. Zoetis’ fourth quarter results are due on February 15.

The market climate has been less favourable to growth stocks of late but MacDonald said he’s not worried about Zoetis.

“There is absolutely nothing that we can see that as fundamentally changed for their business for that medium to longer term growth other than it is a higher growth stock and has been caught up in some of that macro rotation,” MacDonald said.

“But we absolutely think that this is the dominant player in an area that is continuing to see tremendous growth. They also are expanding in their diagnostics business, which is a fairly small component currently. They are going to ultimately directly compete with a company called IDEXX Labs and we’re going to see that start to take hold I would suspect over the next one to two years,” he said.

“So, you’re paying up for Zoetis but it’s a very unique position for us,” MacDonald said.

Last month, Zoetis announced FDA approval for antibody therapy Solensia to control feline pain from osteoarthritis. Zoetis said 40 per cent of all cats show signs of feline osteoarthritis.

“The approval of Solensia is a significant step forward in the control of feline OA pain,” said Mike McFarland, DVM, Chief Medical Officer at Zoetis, in a press release. “Cat owners and veterinarians alike can feel confident that Solensia, with active substance frunevetmab, a monoclonal antibody (mAb) designed specifically for felines, has been studied and demonstrated to control OA pain and help cats get back to moving more freely again.”