Is Zoetis Inc (ZTS) Worth the Premium?

When you look at how Zoetis’ rivals are doing, the company looks pretty good. Eli Lilly & Co. (NYSE:LLY)‘s animal health unit, Elanco, increased sales by only 2% last quarter compared to the previous year. Merck & Co., Inc. (NYSE:MRK)‘s animal health business grew by 4% year-over-year — but still less than Zoetis.

While Lilly encountered headwinds outside the U.S., Zoetis experienced relatively solid operational growth in most of its non-U.S. markets. Zoetis appears to have plenty of opportunity to grow, particularly in emerging markets. For example, it only obtains less than 2% of its revenue from China — a major source of growth potential.

Both Zoetis and Merck benefited from growth in companion animal and poultry markets. Zoetis saw a decline in revenue from cattle. However, the company attributes this decrease in part to a drought experienced this year in the U.S., with cattle producers thinning their herds. Once drought conditions are over, Zoetis could see higher revenue.

The long-term prospects for animal health look good overall. As the world’s population grows, there will be an increased need for protein. This means that the demand for animal medicines and vaccines should grow. As residents of nations with emerging economies increase income levels, there will likely be a corresponding increase in pet ownership. More pets create more business opportunities for Zoetis.

Foolish take
Zoetis is a pricey stock. There certainly are stocks that offer better bang for the buck in terms of growth prospects. However, I like the quality of the growth prospects for Zoetis. The long-term secular trends that affect animal health seem solid.

Another big positive for Zoetis Inc (NYSE:ZTS) is its status as a pure play for the animal health market. With Lilly or Merck, investors must buy a pharmaceutical business to get the animal health business. That’s not the case with Zoetis after its spinoff from Pfizer. Of course, there are smaller pure plays in animal health, but Zoetis is the leader.

I think investors are paying a premium for Zoetis Inc (NYSE:ZTS) due to these factors, but the stock is a good long-term investment. If you held on to your Pfizer shares, I think you’ll be fine. If you did swap some of your Pfizer stock for Zoetis shares, I think you’ll also be fine. Both are good companies — but with different strengths.

Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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