The global pet care market size increased to $232 billion in 2020 and is predicted to expand at a 6.1% compound annual growth rate (CAGR) between 2021 and 2027, according to Global Market insights. This is driven by the growing number of household pets, with one out of five U.S. households now owning a dog. Meanwhile, the global farm animal health care market is poised to grow at a CAGR of 8.2% between 2021 and 2026.
Zoetis (ZTS, Financial) is poised to ride these trends as the world's largest producer of medicine for pets and livestock. The firm has a leading market position across companion animals, cattle, swine and even fish health care in the U.S. and Latin America. They have over 300 product lines, 27 manufacturing sites and a direct presence in over 45 countries.
Source: Zoetis investor presentation
Growing financials
For a company with a $90 billion market cap, Zoetis is growing fast, recording 15% revenue growth in 2021, bringing the total revenue to $7.7 billion for the year. It was interesting to see that growth was driven by the companion animal segment, which was led by their Simparica Trio® product, which increased sales by a metoric 82%. Librela® became the number one pain medication for companion animals in the European Union in its first year and is positioned to expand.
The company offers guidance of between 9% and 11% operational revenue growth for 2022 and 10% to 13% in adjusted net income growth. The company has invested around $462 million in R&D and expects to see an incredible return on capital of 20%.
Margins are also strong with an incredible 36.05% operating margin in 2021.
Is the stock undervalued?
In order to value the firm, I have plugged the latest financials into my discounted cash flow model. I have predicted revenue to grow by 10% for the next five years and the operating margins to increase to 47% in five years. This is very optimistic but in line with the company’s plans.
Given these assumptions, I get a fair value estimate of $157 per share. The stock is currently trading at $195 per share and is thus 24% overvalued, even with incredibly optimistic growth assumptions.
However, the firm is fairly valued relative to the GF Value line. The GF Value is a unique intrinsic value calculation from GuruFocus that considers historical multiples, historical returns and analysts' estimates of future business performance.
Final thoughts
Zoetis is a fantastic company which is the world's largest producer of medicine for pets and livestock. It is set to ride a series of trends which include increasing pet adoption and increasing livestock health care spending. They have been growing both their top and bottom lines well and have a strong market position.
The stock is 24% overvalued based on my valuation model, but fairly valued according to the GF Value. I believe this could be a great long-term investment, but personally I would like to enter at a lower price given the vast number of cheaper opportunities in the market right now.
