Animal Health Stocks: Zoetis and Woof Lead the Pack

 

(Photo courtesy of Flickr, Creative Commons)

By Cheryl Swanson

It’s a dog’s world. Forty-seven percent of American households own at least one dog. In addition to the horde of canines, an estimated 95.6 million felines have human owners (although who owns who is highly debatable with cats).

Money follows love. As a nation, we’re expected to shell out a record $58.5 billion on our beloved furry companions this year. That’s more than double what America spent a mere decade ago.

With other countries following the trend, companion animal spending is at an all-time high. Meanwhile, improving standards of living in emerging markets are driving up demand for meat protein. To meet the demand, the world’s livestock sector is growing at an unprecedented rate, according to the World Health Organization.

These two trends are behind the powerful gains of animal health companies such as Zoetis (NYSE: ZTS), which was spun out of Pfizer (NYSE: PFE) two years ago. In the past year, Zoetis has consistently out-performed its Big Pharma Daddy, both in stock price and earnings gains.

Ready for the kicker? The potential of the animal health space often flies under the radar. Analysts tend to ignore these stocks, despite how minimal generic condition for animal meds gives the industry significant pricing power compared to human pharma. There are also no single payers around (such as government agencies or PBMS) to squash price increases, which can knock a gaping hole in a human health company’s profitability almost overnight.

There’s clear opportunity in the animal health space for investors not afraid to take a bite. Here are two stocks with solid growth prospects over the long term. The first also has a potential catalyst that could lead to big gains this year.

Bill Ackman snaps up Zoetis
Zoetis (NYSE: ZTS) is the largest global animal health company by revenue, and pays a small dividend of about 0.7%.

Scale is a big deal in the animal health, since it allows for higher margins and stronger growth. Zoetis’ size and broad portfolio of drugs helps supports its own sales force, so it can bypass distributors.

Zoetis also has a potentially huge catalyst ahead. Last November, high-profile activist investor Bill Ackman acquired a $2 billion stake in Zoetis and started to work with management. Ackman’s stake is roughly 10% of the company, and he now has one director on the board.

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