Two weeks ago, our beloved 16-and-a-half-year-old dog Rosie, who we call the "Wonder Dog," had a terrible seizure. She was shaking uncontrollably, gasping for breath, and foaming at the mouth. I was terrified and thought she was dying right in front of me.
We rushed her to the nearest pet hospital, where they gave her antiseizure medication, ran a bunch of tests, and monitored her overnight.
The vets aren't sure what caused the seizure. But Rosie was back to normal by the next day, so they discharged her and gave us three medications. She'll take one of them three times a day for the rest of her life.
Our pets are our family... And this incident reminded me just how important it is for animals to receive the best healthcare possible.
So today, I'm taking a closer look at Zoetis (ZTS), the world's largest producer of medicine and vaccinations for pets and livestock.
I took a "quick glance" at the stock in my June 22 e-mail when it was at an eight-year low. And in my July 29 e-mail, I noted that it was one of the 30 worst-performing stocks in the S&P 500 Index so far this year.
But my personal experience makes me curious about the company's financial picture. I figure healthcare for pets must be a good business, given how much we spent on Rosie ($3,700) without debate...
Zoetis was spun out of pharmaceutical giant Pfizer (PFE) in 2013. Its stock was a monster over the first nine years, rising from $31 to nearly $250 by the end of 2021. But it has been a bust since then, losing 70% of its value to close yesterday at $75.35:
Based on that stock chart, I expected to see declining revenues and profits since 2021. But that's not the case at all:
Maybe the past few quarters were especially bad? That's not the case, either... Last quarter, revenue was flat year over year ("YOY"), and net income was only down 4.8%:
Growth has slowed in the past year, but nothing that would explain a 70% drop in the stock since 2021...
Zoetis is a very high-quality business, with high, rising gross and net income margins:
After hitting an all-time high in 2024, free cash flow ("FCF") has remained high, but it hasn't grown:
Zoetis has used its healthy FCF to make a few acquisitions (though none of note since 2018), pay a modest dividend (currently 2.8%), and buy back increasing amounts of stock – which is exactly what I like to see as the share price goes lower and lower:
As a result, its share count declined by 2% annually from 2023 through 2025, then by 6% YOY in the past two quarters:
Dividends and share repurchases in recent years have exceeded FCF, so net debt has risen to $7.6 billion (but this is a modest amount for a company generating $2.3 billion of FCF in the past year):
Overall, I really like what I see in Zoetis' historical financials: high and rising margins, strong (though slowing) revenue and profit growth, excellent FCF, smart capital allocation, and a solid balance sheet.
So why is the stock down 70% from its high? In a word: valuation...
Zoetis' forward price-to-earnings (P/E) multiple was in the 20-to-25-times range in the first four years after it went public. Then, it steadily rose to 50 times by the end of 2021.
But it has steadily declined since then. The stock now trades at 11.8 times this year's consensus analysts' estimates and 11.2 times next year's, as you can see in this chart:
That multiple strikes me as far too low for a business of this quality – unless analysts are completely wrong and earnings are about to fall off a cliff.
Tomorrow, I'll take a closer look at the business and its future prospects. Stay tuned...
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Here's a picture of my wife Susan, oldest daughter Alison, and 5-year-old Phoebe (the "Wonder Pup") when we picked up Rosie:
I rode in the back with my babies as we drove to New Hampshire:
