Zoetis Delivers Strong Operational Results for 2022; No Change to Our Fair Value Estimate

Zoetis capped off 2022 with strong performance in the fourth quarter, and our minor adjustments weren’t enough to materially move our fair value estimate. For the full year, Zoetis delivered 8% operational revenue growth along with 11% adjusted earnings growth, which is largely consistent with Zoetis’ prepandemic performance. Though shares are now fairly valued in our view, we remain enthusiastic about Zoetis’ wide economic moat. From quarter to quarter through 2022, we saw evidence of this wide moat in the ongoing adoption of its companion animal therapies across different disease states. Zoetis has racked up a stellar track record of innovative therapies for dogs and cats that once again saw double-digit growth in the fourth quarter, with the U.S. up 12% and international up even higher at 21% in operational growth. We see little in the competitive landscape to rock Zoetis’ intangible assets in the companion animal segment.

Quarterly adjusted gross margin was slightly short of our expectations due to rising manufacturing costs and foreign exchange. However, we view this as a minor blip and anticipate the firm can make up some ground in 2023 as it rolls out price increases. As we’ve seen with leading companion animal diagnostic firm Idexx, conditions are conducive to assertive price increases with little threat to pullback in demand. For Zoetis, full-year volume grew 5% while price contributed 3%. We think there is room to press on price, especially considering the strength of the firm’s product franchises in dermatology and parasiticides. As always, we keep an eye out for signs that pet owners have lost their appetite for spending on Rover. Though Zoetis saw quarterly animal clinic visits decline 4% year over year, spending per visit still rose 10%. This is similar to the pattern seen at Idexx. Thus far, it’s not clear to us that demand has softened. We continue to observe that vet clinics are often booked and recognize growth in 2021 was especially strong.