Zoetis: A compelling investment in animal health.

Zoetis is the global leader in animal health, specializing in medicines, vaccines, diagnostics, and preventive care for both companion animals and livestock. With a diverse portfolio, strong brand loyalty, and a track record of innovation, the company has built a durable competitive advantage in a growing industry. As pet ownership trends evolve and demand for sustainable livestock production increases, Zoetis is well-positioned for long-term expansion. The question remains: Should this industry leader have a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Zoetis. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Zoetis' direct competitors either. Thus, I have no personal stake in Zoetis. If you want to purchase shares or fractional shares of Zoetis, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Zoetis is a global leader in animal health, specializing in the discovery, development, manufacturing, and commercialization of medicines, vaccines, diagnostics, and related services for companion animals and livestock. Originally founded in 1952 as a subsidiary of Pfizer, the company became independent in 2013 and has since built a diversified, high-margin business serving veterinarians, pet owners, and livestock producers worldwide. Zoetis operates through two geographic segments, with the United States contributing 55% of revenue in 2024 and international markets accounting for 45%. Its revenue mix is further divided into companion animals (68%) and livestock (32%), with the former offering higher profit margins. Zoetis commercializes products across eight core species, including dogs, cats, horses, cattle, swine, poultry, fish, and sheep. Its portfolio spans seven major product categories: parasiticides, vaccines, dermatology, anti-infectives, pain and sedation treatments, other pharmaceuticals, and animal health diagnostics. The company has approximately 300 product lines, with its most successful products including Apoquel, Cytopoint, Simparica Trio, and Librela. These top products drive a significant portion of revenue and reinforce Zoetis’ competitive position in the industry. Zoetis maintains a strong moat through brand trust, intellectual property, and innovation leadership. As the largest animal health company globally, its products are widely trusted by veterinarians, livestock producers, and pet owners. Its extensive portfolio, regulatory expertise, and strong customer relationships make it difficult for competitors to gain market share. The company operates in a highly regulated industry, which serves as a barrier to entry for new players. Zoetis also benefits from economies of scale, allowing it to efficiently launch new therapies across multiple geographies. Zoetis strengthens its market position through a combination of first-mover advantage and strong patent protections. Many of its industry-leading treatments are protected by patents, securing pricing power and limiting direct competition. Zoetis' business model benefits from recurring revenue streams, particularly in vaccines, parasiticides, and dermatology products, which require ongoing treatments. This creates repeat sales and contributes to the company’s high-margin revenue structure.

Management

Kristin Peck serves as the CEO of Zoetis, a position she has held since 2020. She played a key role in the company’s journey to becoming an independent entity, helping to guide Zoetis through its Initial Public Offering in 2013 while serving in senior leadership roles. Under her leadership, Zoetis has strengthened its position as the world’s largest animal health company, expanding into diagnostics and precision animal health while maintaining strong growth in both companion animal and livestock segments. Before joining Zoetis, Kristin Peck was Executive Vice President of Worldwide Business Development and Innovation at Pfizer, where she was responsible for evaluating strategic alternatives for Pfizer’s Animal Health and Nutrition businesses, ultimately leading to the spin-off that created Zoetis. Earlier in her career, she worked at The Boston Consulting Group and held roles in private equity and real estate finance at Prudential Realty Group, The O'Connor Group, and J.P. Morgan. She holds a bachelor's degree from Georgetown University and an MBA from Columbia Business School. Kristin Peck has been recognized for her leadership and the company’s strong performance, particularly during times of uncertainty. In 2022, Barron’s named her one of the Top CEOs, and in 2020, she was recognized by Fortune as a Businessperson of the Year. She also received the Feather in Her Cap Award in 2019 for her contributions to the animal health industry and her mentorship of women leaders. According to Comparably, she has an employee rating of 84/100, placing her in the top 5% of CEOs at similarly sized companies. Kristin Peck has emphasized the importance of agility and innovation in a rapidly evolving market, particularly in navigating regulatory shifts and new competitors in animal health. She has also spoken about the long-term trends shaping the industry, from increased pet ownership to the growing demand for sustainable livestock solutions. Her leadership has positioned Zoetis to continue capitalizing on these trends while expanding into new areas of animal health. I believe Kristin Peck is the right person to lead Zoetis due to her deep industry expertise, proven ability to scale the business, and strong execution through various market cycles.

The Numbers

The first metric we will investigate is the return on invested capital (ROIC). I would like a 10-year history demonstrating a minimum annual growth of 10%. The numbers are promising, as Zoetis has exceeded a 10% ROIC in nine of the past ten years, with the only exception occurring many years ago. Since 2018, the company has consistently delivered a ROIC above 15%, which is an impressive achievement. What is even more notable is that Zoetis has delivered its highest ROIC in the past three years, improving each year. In 2023, Zoetis surpassed the 20% ROIC threshold for the first time, only to exceed that record again in 2024. This increase has been driven by operational revenue growth, lower cost of sales, and the divestiture of its low-margin Medicated Feed Additives portfolio. Given these factors, I have confidence that Zoetis can sustain a high ROIC above 20% moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Zoetis has grown its equity in most years. The slight decrease in 2024 was due to the divestiture of its Medicated Feed Additives portfolio, which is not a concern given the strategic nature of the sale. Additionally, the 2023 figure was elevated by the acquisitions of PetMedix and adivo, making the year-over-year comparison less meaningful. Given the company’s strong fundamentals, I expect Zoetis to continue growing its equity annually unless further divestitures occur.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Zoetis has consistently generated positive free cash flow every year for the past decade. Free cash flow grew almost every year (except for 2019) until 2022, when high inflation and other macroeconomic challenges impacted many companies, including Zoetis. However, the company rebounded in 2023, increasing free cash flow once again before reaching a record high in 2024. This benefits investors, as Zoetis remains committed to returning capital to shareholders through share buybacks and dividends. The record high free cash flow in 2024 enabled Zoetis to repurchase more shares than ever before while also increasing its dividend by 15%. As long as free cash flow continues to grow, investors will benefit. The levered free cash flow margin also increased in 2024, reaching its second-highest level ever and its highest since 2020, which is an encouraging sign. The free cash flow yield is now at its second-highest level in a decade. While this does not necessarily mean the shares are undervalued, it does indicate they are trading at a more attractive valuation than they have in a long time. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing total long-term debt by earnings. After analyzing Zoetis’ financials, I found that the company has 2,1 years' worth of earnings in debt, which is well within the three-year threshold. As a result, debt is not a concern for me when investing in Zoetis. Management has emphasized that debt management remains a key priority, leading to a focused effort on debt reduction. As a result, Zoetis now has its lowest debt-to-earnings ratio since its IPO.

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Risks

Zoetis operates in a highly competitive industry where strong rivals, increasing generic alternatives, and industry consolidation pose risks to its market position. While it is the largest company in the animal health industry by revenue, shifting market dynamics can affect pricing power, market share, and profitability. Zoetis faces direct competition from large animal health companies such as Boehringer Ingelheim Animal Health, Merck Animal Health, Elanco Animal Health, and IDEXX Laboratories. These competitors have significant financial, marketing, and research resources, allowing them to maintain strong relationships with veterinarians and livestock producers while developing new products. Unlike human pharmaceuticals, where large generic manufacturers dominate, the generic animal health market is more fragmented. However, competition from lower-cost generics has been increasing as key patents expire. While brand loyalty provides some protection, generics still present a challenge, particularly in price-sensitive markets. If Zoetis cannot sufficiently differentiate its branded products or adjust its pricing strategy, it may face pricing pressure and volume declines in key categories. In recent years, industry consolidation has intensified competition, with major players acquiring smaller companies or merging to achieve economies of scale. This trend has allowed competitors to expand product portfolios, improve cost efficiencies, and offer bundled solutions, making them more competitive against Zoetis. If these synergies prove effective, Zoetis could experience pricing pressure or market share erosion. Many of Zoetis' competitors are investing in research and development within the same areas where the company currently operates and seeks to expand. A competitor launching a more innovative or cost-effective product ahead of Zoetis could limit its ability to capture market share in emerging categories. Pharmaceutical companies with animal health divisions also benefit from extensive research networks and biopharmaceutical technologies, giving them an advantage in bringing new treatments to market.

Regulations present a significant risk for Zoetis as the global regulatory landscape for animal health products continues to evolve. The company must comply with stringent laws and standards across multiple jurisdictions, covering areas such as product approvals and manufacturing. Noncompliance, approval delays, or stricter regulations could disrupt operations, weaken financial performance, and erode market position. Zoetis' products, including medicines, vaccines, and diagnostics, are regulated by agencies such as the FDA, USDA, and foreign counterparts. Manufacturing facilities are regularly inspected, and any compliance failures - whether at Zoetis or its third-party manufacturers - could result in fines, production shutdowns, product recalls, or legal penalties. If regulatory authorities impose new restrictions, require additional testing, or withdraw approvals, Zoetis may be forced to make costly operational adjustments, delay product launches, or even remove products from the market. Regulatory hurdles also make product launches more complex. Zoetis must secure approvals in each market before selling a product, and this process can be lengthy and unpredictable. Any delays, including those caused by government shutdowns or shifting regulatory policies, could slow revenue growth and disrupt its product pipeline. Even after approval, Zoetis' products may undergo re-evaluation and could lose market clearance if regulatory standards change. If the company relocates manufacturing sites, it may need to obtain new approvals, adding further complications to its supply chain. Given the unpredictable nature of future regulations, Zoetis remains exposed to potential changes in tax laws, tariffs, and compliance requirements that could materially impact its operating results and financial condition. Regulatory compliance remains a constant challenge, and stricter rules could raise costs, delay approvals, or limit market access, threatening Zoetis' long-term growth and profitability.

Production challenges present a significant risk for Zoetis due to the complexity of its global manufacturing network, reliance on sole-source facilities, dependence on third-party contract manufacturers, and the potential for supply chain disruptions. Any issues in production, quality control, or capacity planning could lead to product shortages, launch delays, and financial losses. Zoetis operates a global manufacturing network consisting of 22 manufacturing sites across 11 countries and relies on more than 110 third-party contract manufacturing organizations (CMOs) to meet production demands. Many of its products require highly specialized manufacturing processes, and some are produced at sole-source facilities, meaning that a disruption at a single site could affect the entire supply chain. Even minor deviations, such as temperature fluctuations or improper packaging, can lead to delays, inventory shortages, unexpected costs, recalls, or regulatory actions. Several factors can cause production interruptions, including regulatory non-compliance, mislabeling, equipment failures, material shortages, and labor issues. The reliance on third-party CMOs introduces additional risk, as Zoetis does not have full control over their manufacturing processes, quality standards, or operational stability. If a CMO fails to meet regulatory requirements or experiences operational setbacks, Zoetis may face production delays or need to find alternative suppliers, which can be costly and time-consuming. Accurately forecasting demand is another challenge. If Zoetis underestimates demand, it may struggle to produce and distribute enough inventory, leading to product shortages and lost sales opportunities. Conversely, overestimating demand can result in excess manufacturing capacity, leading to inefficiencies and increased costs.

Reasons to invest

The powerful human-animal bond is a compelling reason to invest in Zoetis, as it drives sustained demand for high-quality pet healthcare and strengthens the resilience of the animal health industry. Pet owners today are younger, wealthier, and more committed to their pets' well-being than ever before, leading to increased spending on veterinary care and advanced treatments. Unlike past generations, Millennials and Gen Z are delaying or forgoing children, with many treating their pets as family members and prioritizing their health. This shift translates into greater spending on pet healthcare, specialized treatments, and preventive care, providing a lasting growth opportunity for Zoetis. Zoetis expects the animal health sector to grow from $45 billion today to $80 billion by 2032, driven by increased pet longevity and greater awareness of medical conditions requiring treatment. As pets age, chronic conditions such as osteoarthritis, allergies, and metabolic disorders become more common, further expanding the market for Zoetis’ innovative therapies. With an extensive portfolio and a strong pipeline, Zoetis is well-positioned to capture this demand, particularly in areas like pain management and dermatology. Unlike other industries affected by economic cycles, the human-animal bond makes pet healthcare an essential and resilient sector, with 86% of pet owners willing to spend whatever it takes to care for their pets. Many of the pets adopted during COVID-19 are now aging, increasing the need for chronic disease management and advanced veterinary care. With a stable pet population, shifting demographics, and a rising willingness to invest in premium healthcare, Zoetis benefits from durable long-term growth drivers.

Zoetis' livestock segment plays a crucial role in the company's long-term growth, benefiting from global trends, strategic portfolio adjustments, and rising demand for sustainable animal protein. While much of the focus is on Zoetis' companion animal business, livestock remains a key contributor, accounting for 32% of total revenue and delivering 5% operational revenue growth in 2024, surpassing industry expectations. A major driver of Zoetis' livestock business is the increasing global demand for animal protein. The world’s population is projected to grow by nearly 2 billion people by 2050, creating a structural need for greater food production. Rising GDP in developing countries is accelerating meat consumption, as higher incomes enable consumers to afford more animal-based protein sources. These factors are fueling consistent demand for livestock health solutions, an area where Zoetis is well-positioned to expand. Zoetis has also taken steps to improve profitability in its livestock portfolio. In 2024, the company divested its medicated feed additives portfolio, a lower-margin segment, to focus on higher-growth areas such as vaccines, antibiotic alternatives, and advanced therapies that enhance disease prevention and animal welfare. This shift not only streamlines operations but also strengthens profitability by improving the company’s overall product mix. Beyond revenue growth and margin expansion, global food security is becoming increasingly important for livestock producers. Governments, regulators, and consumers are placing greater emphasis on high-quality, safe, and sustainable food production. This is driving demand for preventive care, disease management, and productivity-enhancing solutions - areas where Zoetis holds a competitive advantage with its diverse portfolio of vaccines, lifecycle management solutions, and precision animal health technologies.

Zoetis' diverse portfolio and robust pipeline provide multiple growth drivers across established and emerging therapeutic areas. With a broad geographic footprint and a well-balanced mix of high-margin, high-growth products, the company continues to expand its market share while addressing evolving medical needs. Zoetis’ companion animal segment remains a key driver of growth, particularly in parasiticides, osteoarthritis pain management, and dermatology. Simparica Trio is the leading canine parasiticide in the US, with over 50% of puppies now on triple combination treatments, a market expected to more than double to $4,5 billion by 2028. Pet owners rarely switch brands once treatment begins, ensuring strong long-term revenue visibility. As adoption among veterinarians and pet owners continues to rise, Zoetis is well-positioned to maintain its leadership and expand market share. Zoetis has also built a blockbuster osteoarthritis pain management franchise with Librela and Solensia. Librela’s US launch was the most successful in Zoetis’ history, reaching blockbuster status in less than a year. With 40% of dogs suffering from osteoarthritis, the long-term growth potential remains strong. Solensia has had a similar impact in feline osteoarthritis for cats, driving greater veterinary visits in a historically underpenetrated market. The dermatology franchise continues to be another major growth driver. Despite over 25 million dogs already treated, the total addressable market is expected to reach $2,5 billion by 2028, driven by greater pet owner awareness, higher compliance, and increasing adoption of long-acting formulations. There are still 20 million dogs worldwide that remain untreated or undertreated, offering a long runway for continued expansion. Beyond its current portfolio, Zoetis has one of the most promising pipelines in the animal health industry, with multiple potential blockbuster treatments in development. The company is expanding into chronic kidney disease, oncology, and cardiology, all of which represent multi-billion-dollar market opportunities with significant unmet medical needs.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 5,47, which is from the year 2024. I have selected a projected future EPS growth rate of 11,5%. Finbox expects EPS to grow by 11,5% in the next five years. Additionally, I have selected a projected future P/E ratio of 23, which is double the growth rate. This decision is based on Zoetis' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $92,36. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Zoetis at a price of $46,18 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.953, and capital expenditures were 655. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 459 in our calculations. The tax provision was 637. We have 448,5 outstanding shares. Hence, the calculation will be as follows: (2.953 – 459 + 637) / 448,5 x 10 = $69,81 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Zoetis' free cash flow per share at $5,09 and a growth rate of 11,5%, if you want to recoup your investment in 8 years, the Payback Time price is $68,54.

Conclusion

Zoetis is an interesting company with good management. It has a strong moat built on brand trust, intellectual property, and innovation leadership. The company has consistently achieved a high ROIC, reaching a record in 2024. Zoetis also delivered its highest free cash flow in 2024, with the levered free cash flow margin reaching its second-highest level. Zoetis faces strong competition from major animal health companies, rising generics, and industry consolidation, which could pressure pricing and market share. Expiring patents and rival innovations may further challenge its competitive edge. Regulatory risks remain a concern as compliance with evolving global standards can increase costs, disrupt operations, and limit market access. Production risks also exist due to reliance on sole-source facilities and third-party manufacturers, where supply chain disruptions or capacity imbalances could lead to shortages and delays. The growing human-animal bond is driving sustained demand for pet healthcare, as younger, wealthier pet owners increasingly treat their animals as family members and prioritize their well-being. With rising pet longevity and greater awareness of chronic conditions, Zoetis is well-positioned to benefit from this resilient and expanding market. Its livestock segment also benefits from rising global demand for animal protein and increasing focus on food security. By prioritizing higher-margin products like vaccines and disease prevention solutions, Zoetis has strengthened profitability while maintaining its leadership in livestock health. Zoetis' diverse portfolio and strong pipeline drive growth, with leadership in parasiticides, osteoarthritis pain management, and dermatology. With a track record of blockbuster launches and expansion into high-growth areas like chronic kidney disease, oncology, and cardiology, Zoetis is well-positioned for long-term market share gains and revenue growth. I believe there is a lot to like about Zoetis, and while I typically seek a discount to intrinsic value, such opportunities are rare. I believe opening a starter position at $139, the intrinsic value based on the Ten Cap price, could be a good long-term investment.

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