Zoetis' Q2: The Data vs. The Clickbait

Hi reader,

Zoetis reported good earnings some weeks ago, and the market liked them. The stock went to a short-term low of $145 in April while I was on my honeymoon due to an article in the WSJ (Wall Street Journal) about Librela’s secondary effects. The stock fell around 8% after the release of this article. I didn’t publish an update back then, but I shared the following with subscribers:

I read the WSJ article on Zoetis, seems pretty speculative at this point to be honest, especially because side-effects are intrinsically linked to drug development. Might add on Monday to my position if I have time.

The stock is up 27% since then, and management has shown over the last two quarters that fears were unfounded (more on this later).

The media is typically very good at selling headlines and generating clicks, but we might be better off not looking for investment signals in those headlines. Zoetis, by the way, is one of those “rare” companies (like Danaher) that have yet to reclaim all-time highs. The reason is also the pandemic, although it bears a slightly different explanation than Danaher. Zoetis did not benefit from the rise in COVID-related revenue (at least not in a direct way), but COVID brought with it a “pet craze.” This pet craze accelerated the company’s organic revenue, which evidently many investors thought would be sustainable into the future.

Zoetis posted organic growth of 8%, 15%, and 9% in 2020, 2021, and 2022, respectively. These growth rates were above the company’s long-term performance, and many probably thought they were the new norm. As with many things that took place during COVID, it wasn’t. And don’t get me wrong, I believe the company is indeed a growth company, but after the normalization of its revenue growth rate in 2023 to 6%, the market expectations rerated, and so did its multiple. The company is today trading at a significantly lower multiple today than during the pandemic, with the sole difference that growth is now accelerating for fundamental reasons rather than on the brink of facing a slowdown caused by a pandemic pull forward:

This, of course, does not automatically make the company cheap. Valuation is something I’ll address in the last section of this article.

Without further ado, let’s take a look at its earnings.