Today we're covering a new type of healthcare company that we've never discussed before.
While this company is pretty massive, most retail investors completely glance over it.
That is because the stock we're discussing today focuses their core products on medicine and vaccinations for pets & livestock.
Once a subsidiary of Pfizer, Zoetis is now the world's largest producer of these specific types of vaccines and medicines.
And after reporting a very impressive earnings call yesterday, Zoetis looks ready to be one of the top healthcare stocks over the next few years.
Animal Healthcare Market Size:
If you're not familiar with the market opportunity, the global animal health market size was last valued at $45 billion in 2020 and is expected to grow annually by 9% from 2022 to 2028.
The reason for this large uptick in growth is largely due to a significant rise in demand for protein-based foods and an increase in the incidence of zoonotic and food-borne diseases globally.
Pair that with COVID likely stemming from an animal, and the market opportunity for this unique sector within healthcare is much bigger than most investors realize.
Zoetis Overview:
So now that the stage has been set for the size of animal health in general, let's get into the specific of Zoetis.
Zoetis just reported a huge earnings announcement yesterday and the outlook for their stock looks better than ever. The most impressive things we saw were:
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Zoetis reported 4th quarter EPS of $1. This beat expectations by 5%, which is better than most people would give them credit for in this environment. In the face of severe FX headwinds, this beat is more impressive than meets the eye.
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Zoetis also raised their go forward guidance for the rest of the calendar year. As we mentioned yesterday, when companies raise their guidance and also beat expectations, that should be a massive signal to most investors. And when looking specifically at their guidance, they're planning on raising revenue & EPS estimates by 10%. Which, as we mentioned above, is impressive as these FX headwinds are likely to persist. This truly underscores the strong operational execution of the ZTS senior leadership team.
And the craziest thing is that we believe the market is completely discounting this success.
This is because when looking at their stock, we can see that it is actually down 15% YTD. So where's the disconnect?
What Investors Are Missing:
Zoetis (ZTS) are silently the kings of innovation. And they're expected to continue that silent reputation due to their insane R&D pipeline of over 300 active projects!
While many of these projects will likely be depreciated, their continued commitment towards internal investments and success in growth initiatives will give them exposure to medicines and vaccines that should push revenue growth substantially higher in 2023.
One of the drugs in that pipeline is Librela. To spare you the boring medical details, Librela is the first innovative arthritis therapy for dogs in decades!
While you may be thinking that this seems excessive, we actually project for this drug to have massive implications for Zoetis going forward.
Early estimates show that this drug could reach blockbuster status seemingly overnight with over $100M in expected sales over the next 12 months.
How The World Is Changing:
What's even more is that investors are completely discounting the societal changes happening right before their eyes.
And after looking at the early data, we see that not only is human traffic up but US veterinary practice revenue grew by 8.3% last quarter and visit growth increased by 1.5% too.
So when pairing the potential of this breakthrough drug, with the pent up demand of more people bringing their pets into offices, we think ZTS could be in the middle of a perfect storm.
This could lead to a huge boost in revenue growth in the back half of 2022. And most investors are completely missing the details of Zoetis let alone how societal changes will benefit them.
And keep in mind this is just one drug - they have 299 more in the pipeline!
Zoetis Stock Outlook:
Therefore we view their stock deprecation this year as completely oversold.
With the company now trading inline relative to their peers (~35x forward looking P/E), we think the bottom is approaching and the stock could be ready to rebound significantly throughout the rest of 2022.
Given biotech plays like these are often associated with growth, and there's been a strong move to value over the last several months, we think the fears should be ending soon.
And as you can see now, we think the latest moves downward are more attributed to macro pressures than anything specific due to the stock.
Once this play unwinds, and "safe" plays like this come back into fashion within this sector, we think ZTS will be standing by ready to receive a large portion of the eventual tailwinds.
Therefore when combining this eventual rotation, with the strong tailwinds in the back half of 2022, we believe ZTS could be in store for a strong 12 months!
Price Target: $262 (38% upside)
Current Price: $190
Target Date: Q4 2022
Rating: Overweight
Ticker: ZTS
Risk / Reward: High / High
Market Cap: $94B
Dividend Yield: 0.66%