Zoetis Dogged by Short-Term Turbulence, but Its Wide Moat Remains the Cat's Meow

Zoetis reported third-quarter results that were characterized by a number of growing pains that we categorize as short-term turbulence, but we’ve moderately trimmed our fair value estimate to $170 per share, down from $186, after adjusting our estimate for 2022-23 to reflect ongoing unfavorable foreign exchange, drag from near-term materials shortages, and the delay in U.S. regulatory approval of Librela. Nonetheless, shares remain undervalued from our perspective. Despite these near-term constraints, we see little to alter our confidence in Zoetis' wide economic moat, including its intangible assets and cost structure. Indeed, Zoetis continues to enjoy gross margin nearly 1,200 basis points higher than that of Elanco, its closest stand-alone animal drug competitor. Considering Zoetis' success in shifting its portfolio toward the more-innovative companion animal products with more pricing power, we expect the firm can maintain this advantage over Elanco.