In yesterday's e-mail, I analyzed Zoetis (ZTS), the world's largest producer of medicine and vaccinations for pets and livestock.
I concluded that it has excellent financial characteristics and that its valuation is "far too low for a business of this quality – unless analysts are completely wrong and earnings are about to fall off a cliff."
Today, I'd like to share the bull and bear cases for the stock...
I first became aware of Zoetis when my college buddy Bill Ackman of Pershing Square Capital Management bought nearly $2 billion of stock in the company in 2014.
He highlighted the high quality of the business and pushed for cost cuts and operational improvements. (He outlines his thesis starting on page 28 in his European Investor Meeting presentation on April 26, 2016.)
His activist campaign resulted in a sweeping internal efficiency program, which boosted margins and the stock. He sold two years later for a nice gain – but missed an additional 400% run-up in the next five years.
The stock hit my radar screen again this year when my old friend Michael Burry of The Big Short fame disclosed that he was buying it...
On May 7, Burry wrote on his Substack (for paid subscribers):
I have been waiting for this price [$86] for a good long time, and I believe it is oversold on news today of a small guidance cut.
Zoetis is a global leader in animal health with a stellar long-term record of returns on invested capital/capital allocation. The company is run very well, conservatively financed, and is now trading below my [buy-price target] – the price at which I expect 15% annualized returns for 15 years or more.
I have little doubt Zoetis will continue to buy back shares at these levels, and I will look to buy more if it falls to about $70.
On June 16, he bought more at $78.70, noting:
The volume swell says we are closing in on a bottom. This is a world-class global animal health company, the only pure play with truly stellar and steady [return on investment]. Recent troubles are far overstated for this potential forever hold.
And on August 7, he bought more at $72.72, comparing Zoetis favorably with rival Elanco Animal Health (ELAN):
Zoetis now trades at a discount to Elanco, and the narrative has shifted tremendously.
I was long Elanco when it was more out of favor and know it well. It is winning a bit in the vet's office, but the company is much more than that, both positively and negatively. There is a lot of debt. 22% of EBITDA [earnings before interest, taxes, depreciation, and amortization] goes to interest expense, against 4% at Zoetis.
Elanco now trades at nearly 15x EBITDA and about 20x earnings. Zoetis, long the favored stock of the pair, now trades at roughly 10x and 12x respectively, but with much better free cash flow conversion, and a much cheaper balance sheet.
Burry argues that Zoetis' financials are better overall:
Zoetis is batting from a much stronger stance, with the historically better batting average, higher historical returns on investment and superior pipeline productivity. Zoetis also retains a [2-to-1] research dollars advantage over Elanco. However, it is losing a bit in the vet's office, which is dramatically affecting perception of the company.
Actually, Zoetis lost 10 points of U.S. in-clinic dermatology share year over year. Elanco maybe captured [one-third] of the dollars Zoetis lost in the U.S. companion animal business. The rest were smaller competitors and contraction in the category. This is not a story of terminal decline at Zoetis.
In its U.S. segment, Zoetis has 80%+ gross margin and 66% operating margins. Elanco's gross margins are projected at just 55-56%. If this becomes a price war, Zoetis will win. Elanco is guiding down already, and with its leverage and lower margins, it does not have the legs to go against Zoetis long-term.
He concludes:
Zoetis is not perfect. It probably bought too much stock at $124 with proceeds from a $2 billion December 2025 convertible note, though I think in the long term that will look fine...
They bought a lot more stock at $90 earlier this year. Harder to argue with that one, as I believe the stock is cheap at $90 too.
Zoetis management refused to say whether stabilization in the U.S. would take 6 months, 12 months or 18 months. Wall Street has no such patience, and has put the shares on sale.
Along the same lines, user "Mike126" pitched Zoetis on stock-idea website Value Investors Club on May 8 (only members can view the full post). At the time, the stock was at $82.83.
He says the drop in ZTS is mostly due to issues with the company's U.S. companion animal ("CA") segment:
The US CA segment is Zoetis's largest and accounts for 44% of total revenue and likely 50-60% of total [earnings before interest and taxes]. Revenue growth in US CA decelerated from 25% in [fiscal year 2021] and 15% in [fiscal year 2024] to 0% in [the second half of 2025] and -11% in [the first quarter of 2026].
The main problem Zoetis has always had is that its US CA segment was overly concentrated in a few blockbuster drugs. These drugs are in dermatology, parasiticides and osteoarthritis... and all 3 are facing some problems...
However, he argues:
[On] the bright side, many of ZTS's other products have been off-patent for years and the patent cliff drop-off has been manageable...
ZTS has still continued to outspend competitors (including Elanco) on [research and development] for many years and does have new products slated for launch in the coming years.
Mike126 concludes:
ZTS's valuation is embedding a profoundly negative view on Zoetis's future profits, and it makes sense for me to fade that...
I think Zoetis's current travails in the stock market create a unique entry point. It is going through a classic "pipeline gap", i.e. ZTS has no exciting new introductions in [2024 to 2026] while competitors have several...
It is not comfortable/pleasant owning something where there won't be any good [or] exciting news associated with it for a while, but I guess that is what value investing is often about.
Turning to the other side of the debate, reader Ahsan S. e-mailed me yesterday with a good outline of the bear case on Zoetis:
The stock price correction from $250 to ~$150 was due to normalization of the hypergrowth that Zoetis witnessed after the Covid pet boom.
But the slide from $150 to $70 is purely due to genuine competition from Elanco, which is giving Zoetis a really tough time in their Dermatology and Parasiticides franchise. Zoetis has lost 14% market share to Elanco in Dermatology in the past 5 quarters and the bleeding continues.
Not taking any credit away from Elanco, Zoetis was extremely slow to react to the competition and management failed miserably to react to the changing situation and hence the departure of the chief financial officer in this quarter. Zoetis tried to defend its margin when it had to lower the price to defend its market share.
Ahsan concludes:
ZTS shares will only perform in the coming quarters if the market sees green shoots on the market share loss to Elanco. Their long-acting pain drugs recently launched in the European Union and Canada will also be eagerly watched by the market for a rebound in sales.
Overall, it's a good story made hostage by poor management and maybe waiting for an activist investor.
Burry, Mike126, and Ahsan have excellent insights, making it clear why Zoetis' stock has fallen so much.
The company is facing significant competitive headwinds that may cause profits to decline over the next year, which would force analysts to cut their forecasts for 2026 and 2027. (Consensus estimates are $6.29 this year, rising 7% to $6.73 next year.)
But it looks to me like the market has already factored this in – and then some. At a minimum, a company of this quality should trade at a market multiple, which is roughly double its current price-to-earnings ratio of around 11.8 times.
That means the market is pricing in a 50% drop in Zoetis' earnings... which I think is highly unlikely.
My team and I at Stansberry's Investment Advisory will do a deeper dive into Zoetis. If we decide it's a buy, as always, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.