Zoetis and Its Wide Moat Are Well Positioned for Post-COVID-19 Conditions

Zoetis wrapped up 2020 with further strength in is companion animal business during the fourth quarter, and we plan to moderately increase our fair value estimate after incorporating more optimistic estimates for the 2021-2023 time frame. Although 2020 revenue outpaced our projections by roughly 300 basis points, this was generally offset by expenses that also exceeded our estimates. We remain confident in Zoetis’ wide economic moat, which is built on a cost advantage moat source as well as intangible assets. The profitability gap between Zoetis, the leader in animal healthcare, and number 2 Elanco hasn’t much changed over the last year. Gross margin at Zoetis runs approximately 69%, while Elanco has recently been at 50%. Though Elanco management seeks to improve its performance on this measure, and the addition of Bayer’s animal health division with estimated gross margin of 64% should have given profitability a boost, Elanco has yet to make good on this goal. In the meantime, Zoetis continues to eke out incremental efficiencies and press its advantage in the U.S., where gross margin now exceeds 80%.