Zoetis Inc. (ZTS): A Bull Case Theory

We came across a bullish thesis on Zoetis Inc. (NYSE:ZTS) on Substack by Best Anchor Stocks. In this article, we will summarize the bulls’ thesis on ZTS. Zoetis Inc. (NYSE:ZTS)’s share was trading at $164.70 as of Dec 24th. ZTS’s trailing and forward P/E were 30.96 and 28.41 respectively according to Yahoo Finance.

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Zoetis delivered an impressive earnings report a month ago, surpassing revenue and earnings estimates while raising its guidance. Despite the strong performance, its stock dropped post-earnings, though it has since rebounded, maintaining levels similar to before the report. Considering the company’s flawless quarter and growth acceleration, this drop was puzzling. Zoetis has posted three consecutive “beat-beat-raise” quarters this year, marking its solid momentum. The company’s revenue grew 11% in the quarter, with operational growth of 14%, the highest since the pandemic-driven surge. This accelerating growth contradicts earlier skepticism in 2022, when some analysts labeled Zoetis as a no-growth business.

A major driver behind this growth has been the success of Zoetis’ monoclonal antibodies (MABs) for osteoarthritis (OA) pain, namely Librela and Solensia, which have performed exceptionally well in both the U.S. and Europe. These products experienced a 97% operational growth year-over-year, with Librela becoming the fourth-largest product in the U.S. market. In Europe, the MAB franchise continues to expand, with Librela showing strong growth despite its established scale, as the product now treats milder OA cases. This expansion increases the patient population and reduces churn, extending patient retention to 7-8 months, up from 4-5 months just a few years ago.

Zoetis’ ability to create new markets is evident in the OA MAB franchise, which was not part of its addressable market (TAM) until recently. Products like Librela and Solensia are now poised to become billion-dollar franchises. Librela, for instance, has already brought nearly 500,000 new patients to the OA pain category in the U.S. While the market expressed concerns about sequential growth for Librela in the U.S., management argued that growth in newly created categories is not always linear, pointing to a similar pattern in Europe the previous year.

Other Zoetis franchises also performed well, with Simparica and Dermatology showing operational growth of 27% and 16%, respectively. Despite facing competition, Zoetis continues to gain market share in these categories, underscoring its resilient business model. Zoetis contends that competition helps expand the market, and its products maintain strong market positions as long as they are sufficiently differentiated. This has been the case with Simparica Trio, which has grown revenue significantly despite new entrants.

The company also managed to balance growth between volume and price increases, with volume contributing 8% growth and price 6%. While veterinary inflation remains a concern, Zoetis’ pricing strategy reflects the growing mix of innovative products, which justifies the higher prices.

Zoetis revised its 2024 guidance slightly, increasing revenue growth from 10% to 10.5% but lowering net income growth expectations from 14.5% to 14%. Despite the sale of its feed additive portfolio, which will reduce revenue by about $66 million per quarter, Zoetis remains focused on its core business and the continued rollout of its OA pain MABs. Management expressed confidence in strong growth for 2025 despite competition for products like Apoquel. Overall, Zoetis’ strong quarter, broad-based growth, and market leadership in animal health reinforce its position as a growth stock in an expanding industry, driven by the increasing number of pets and their unmet health needs.

Zoetis Inc. (NYSE:ZTS) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 62 hedge fund portfolios held ZTS at the end of the third quarter which was 61 in the previous quarter. While we acknowledge the risk and potential of ZTS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ZTS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.