Zoetis (NYSE: ZTS) shareholders may have a new reference point to be excited about, even after witnessing some favorable developments through the company's first quarter 2023 announcements. Even after outperforming other peers in the sector, such as Bausch Health Companies (NYSE: BHC) and Elanco Animal Health (NYSE: ELAN) by as much as 32% and 75%, respectively, analyst ratings still suggest that Zoetis stock has a double-digit upside potential ceiling from today's prices.

News has broken out regarding JAB's acquisition of the pet insurance platform Pumpkin. In an attempt to expand its global leadership in the pet insurance industry, JAB's acquisition indirectly benefitted Zoetis, which still is looking to maintain its minority interest in the platform. A continued commercial partnership and financial interests will no doubt accrue to Zoetis' financials moving forward. While the transaction terms have not been disclosed, some analysts can derive some valuation given the sixty-five thousand pets insured since Pumpkin's launch in 2020.

Patience Pays Dividends

As investors stuck to Zoetis' management value proposition, as stated in the latest investor presentation, the fruits of a remarkable business model are starting to bear. Zoetis can outperform its peers in the animal health industry because of its fundamentals. 64% of the company's revenue is derived from companion animal products, such as pharmaceuticals and anti-infective products for domestic pets. The remainder of the revenues come from livestock care products, providing the backbone to sustain America's meat industry. By implementing its five strategic priorities, Zoetis has become a world leader in animal healthcare, establishing itself as a low-volatility entity in both financials and stock price action (as it sports a 0.76 beta to the S&P 500). 

Understanding the responsibilities of being an industry leader, Zoetis answers shareholder needs by looking for further growth opportunities. However, knowing that new investments into technology and emerging markets cannot guarantee results, management has decided to increase dividend payments to cushion any investor disappointment in the company's capital expenditures. Today, Zoetis dividend offers shareholders a near 1.0% yield, which is high historically. Typically, the dividend yield on ZTS stock has hovered between 0.50% and 0.65%, with 1.05% being its highest level ever; today's yield may raise suspicion of undervaluation. 

After experiencing supply chain disruptions and shipment bottlenecks throughout 2020-2022 as COVID-19 effects took a toll on these networks, management has upped its efforts to diversify and strengthen its position in other regions. Manufacturing operations now include several locations across Europe, with other minor sites in East Asia and Brazil. As a result of gaining a significant chunk of the animal healthcare market share, revenues have also been diversified globally, accruing to the compressed volatility within the company's financial cycles.

Growth Ahead

Over the past six years, Zoetis has consistently achieved higher revenue growth rates than the overall market. Growing the top line at an average 8% rate has allowed Zoetis management to provide optimistic outlooks for the remainder of 2023. As margin expansion initiatives are implemented via economies of scale and technology, 2023 will potentially see another 6% to 8% growth in net revenues. With operational development targeted to fall between 7% to 9%, adjusted earnings per share would print within the $5.34 and $5.44 range. Delivering an 18.9% to 21.2% annual growth in earnings per share would play right into analyst expectations.

Zoetis analyst ratings suggest that the stock still has a 24% ceiling to be reached from today's prices. All of the capital expenditures allocated toward research and development (closing into 6% to 8% of revenue) have yielded new products approved by international entities. Simparica Trio is one of the latest product releases by Zoetis, acting as an oral parasiticide; the latest medicine introduction has received approval from the European Union. Cytopoint is another new introduction, a monoclonal antibody for allergy treatment in canines, approved by Japanese authorities to be sold in the nation's drug market.

Considering the implications of JAB's acquisition of Pumpkin, and the respective synergies to be achieved in the pet insurance market as a link to Zoetis as a medicine provider, shareholders can continue to expect double-digit growth rates at reasonably low volatility levels. Furthermore, allowing JAB, a direct insurance operator, to focus on the growth of Pumpkin will enable Zoetis to remain focused on its medicine solutions. This dynamic ensures that both entities are optimally managed and exposed to the growth potential they can achieve, of course, Zoetis shareholders being a direct benefactor of this relationship.