Zoetis Inc (ZTS)

A bit disappointing. Headwind from near-term, cyclical pressures as economy weakens and vet visits decline. Company sees itself as defensive -- people prioritize their pets, aging population, younger generation having pets instead of children. Competition on drugs, adverse press to dog pain management drug. Still likes longer, secular trend.

2/3 pet pharma, 1/3 livestock. Time to market is lower than for human pharma, not as much generic competition. Overhang from negative press about unwanted effects from painkillers -- anecdotal, not based on data. Good growth going forward. Yield is 1%.

Livestock has come back since Covid plus, as people become wealthier, they eat more protein. Pet side is going like gangbusters. Lots of products in pipeline. Incredible run during Covid, now taking a break. Will continue to do well.

Pet division is about 2/3 of revenue, livestock makes up the rest. Around for 65 years, spun off from PFE 10 years ago. Animal health industry has very little generic competition, so product life tends to be over 25 years. Leading share globally. Invests in R&D. Pullback is attractive opportunity. Yield is 1%.

That conversion metric is a good one. Transitioning some drugs, so growth has slowed, impacting free cashflow. Increase in R&D taking up capital. New drugs in pipeline. Story still stands. Good value compounder over time.

Their last quarter was weak, but he thinks it's a one-off event. Be believes in the CEO and company long term.

Stock's done well, especially with recent rally. For new money, wait for pullback, and we'll get that eventually. Great products, especially launch of drug for canine arthritic pain. Pet division is somewhat recession-resistant.

It has two parts in animal healthcare: livestock and pet care and it is the second part which has done very well. The drugs component has advantages over regular pharma companies and there are great products in the pipelines. There are only two other big players and Zoetis is the biggest of the three.

Likes their growth. Spending on pets remains steady, a plus. But the PE is 35x, so no.

Spinoff from Pfizer in animal health.
Pet spending on the rise.
Current valuation too high. Wait before buying.
Strong business overall.

It is in the animal heath care business with two divisions: livestock and pet care which is the biggest division with lots of growth. Insurance is not very involved in the pet care business, so is not as powerful a component. Also drugs for animals generally get faster approval. Buy now on this pullback.

Industry leader in pet and livestock space. Grows about 8% a year, industry average is 5%. Great leadership. 40% EBITDA margins. Growth flows to the bottom line, really nice free cashflow. 

Never gets cheap, but you want the exposure for the long term. Stronger pricing power than traditional pharma, doesn't have the competition from generics. Yield is 0.77%.

Pet segment will continue to grow and livestock will come back online, boosting earnings. Good growth business. Great drug pipeline over the next few years. 

ZTS has demonstrated consistent, stable and recurring revenue growth, and is now trading at a 30.3X forward P/E, which has come down from its peak of ~39X in 2020. It has shown great margin expansion over the years and it uses all of its free cash flows and more to repurchase shares and issue a dividend. The balance sheet is OK, and it has a decent history of beating earnings estimates. A lot of the value in ZTS is driven by its combination of margin expansion and aggressive share buyback plan. We would be comfortable with the name over a 3 to 5 year horizon due to its strong free cash flow generation, shareholder-friendly management team, and strong margins, but it does trade at a premium valuation and its balance sheet could be stronger. We would be comfortable averaging into ZTS over time.
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