Zoetis Inc - Class A

We added one new stock to the portfolio last quarter, Zoetis. Zoetis is the world’s largest pure-play animal health company. We have long viewed Zoetis as one of the highest-quality businesses in healthcare, and the company has generally been valued accordingly. However, temporary concerns around slower companion animal growth and increased competitive pressures created an opportunity to purchase the company at an attractive price. At our purchase price, we were able to acquire a business with industry-leading margins, strong free cash flow generation, and a dominant competitive position for less than 11x earnings. We believe this valuation reflects an overly pessimistic view of the company’s long-term growth prospects and fails to recognize the strength and durability of the underlying franchise.

Zoetis (ZTS) was our largest detractor in terms of performance in the second quarter after reporting disappointing quarterly results. The company continues to see pet owners reduce expenditures in the face of macroeconomic headwinds, negatively impacting veterinary visits and resulting in lower demand for the company’s premium products. In addition, competition continues to weigh on the company’s largest dermatology segment, with lower-priced alternatives taking incremental market share. Meanwhile, new product introductions are being delayed, an unwelcome surprise, as new products were expected to help Zoetis regain market share.

We initiated the investment in U.S.-based animal health care firm Zoetis. Zoetis is the global leader in animal health, providing a broad portfolio of vaccines, medicines, and diagnostics across both companion animals and livestock. The company has historically been able to generate what we consider attractive returns on capital, underpinned by its leading market share, diversified and broad global footprint, and leading research and development (R&D) capabilities. Despite recent share-price weakness, we see this as an opportunity to invest in a well-positioned company at an appealing valuation.

Zoetis is owned for its attractive sustainability opportunity profile in areas including Wellbeing and Evolving Health Care Challenge, as well as its strong governance profile. However, the stock declined sharply in the quarter following a downward revision to near-term earnings guidance. Sales of Librela, the company's key canine arthritis pain management product, continued to face headwinds from safety perception concerns among some veterinarians, and management indicated that the ramp-up of next-generation product launches would extend into the following year.

Zoetis (ZTS), an animal health biopharma company, reduced guidance after new generic entrants in dermatology discounted more aggressively than anticipated. Consumer discretionary spending has also been strained, leading to a slowdown in overall market growth. While there are limited pipeline catalysts over the next year, there are several promising medium-term candidates in the company's pipeline.

Shares of Zoetis, an animal health company, underperformed after the company reported flat organic revenue growth and lowered full-year guidance amid softer US companion-animal demand, fewer veterinary visits and a more competitive market. The challenges in the market have led to a reassessment of the company's growth prospects, prompting us to reduce our position.

In March, we added a new position in the Health Care sector with Zoetis (ZTS), the global leader in vaccines and pharmaceuticals for both the companion animal and livestock markets. We believe that revenue is positioned to reaccelerate as COVID-era pets approach the age when preventive and protective treatments begin, driving demand for professional veterinary services. We particularly like the company’s new drug pipeline, with new drug launches over the next four years targeting cancer, kidney, heart, obesity, and anxiety treatments. In addition, we believe that increasing demand for protein consumption and a relaunch of the company’s pain medication will likewise help reverse recent revenue deceleration.

Zoetis operates in a strong growth sector driven by the progressive industrialization of livestock and an increasing number of pets. With a P/E ratio of approximately 20, its valuation is below the five-year average, indicating a rare entry opportunity for this quality leader. The historically high margins in the animal health sector further confirm the fundamental attractiveness of this stock, making it a compelling investment for patient value investors.

Zoetis is the leading Pharmaceutical and Vaccine Developer in the Animal Health market, which is expected to grow 5-6% annually for the next decade. The company has a strong track record of organic revenue growth at 8% annually, outpacing the industry average. With a deep pipeline of new drugs, including 12 potential blockbusters, Zoetis is set to launch at least one major blockbuster each year for the next four years. Their financial performance is robust, with operating margins of 35-39% and a return on invested capital of 17% or more. We believe the near-term concerns regarding newer drugs have created an opportunity to invest in a high-quality compounder at the bottom of its intrinsic value range.

The fund has topped up its existing holding in Zoetis, indicating a positive outlook on the company. This action suggests that the manager believes Zoetis is well-positioned for growth within the health care sector, particularly as it continues to innovate and expand its product offerings. The decision to increase exposure reflects confidence in Zoetis' ability to deliver strong performance in the future, aligning with the fund's strategy of investing in quality growth companies.