In their second quarter 2025 client letter, Wedgewood Partners introduces a new position in Zoetis Inc. ($ZTS), the global leader in animal healthcare. Wedgewood Partners, known for their disciplined long-term growth investing approach over 30+ years, presents Zoetis as a prime example of their investment philosophy of buying high-quality companies when they fall out of favor. The letter emphasizes their strategy of monitoring great businesses for years and capitalizing when market sentiment provides attractive entry points. Wedgewood’s decision to invest in Zoetis comes after years of observation, waiting for valuation discipline to align with the company’s strong fundamentals and secular growth drivers.
Investment Highlight: Zoetis Inc. ($ZTS)
Business Overview
- Global leader in animal healthcare with operations in over 100 countries
- Spun out of Pfizer, benefiting from pharmaceutical R&D heritage and patent licensing
- Revenue split: ~55% U.S. (pet-focused), ~45% international (livestock-focused)
- Global business mix: ~70% pet/companion animals, ~30% livestock
Market Position
- Provides medicines, vaccines, diagnostic testing, and related products/services
- Benefits from lower-risk R&D approach, extending existing products to new species/indications
- Leverages Pfizer’s historical scientific breakthroughs and patent portfolio
- Strong market position in both developed pet markets and developing livestock markets
Performance Analysis
- Financial Metrics (2016-2024):
- Revenue growth: Consistent mid-to-high single digits (2.6%-16.5% range)
- EBITDA margin: Improved from 33.6% to 42.0%
- ROIC: Strong returns, reaching 21.3% in 2024
- High and improving profitability levels
- Pet Market Drivers:
- Increasing pet ownership (7% more dog households, 15% more cat households 2021-2025)
- Personification of pets as family members (“pet parents” phenomenon)
- Longer pet lives leading to more advanced care needs
- U.S. pet industry spending growth from $97B (2019) to $157B estimated (2025)
Growth Runway
- Secular growth in pet ownership and quality of care
- Example: Apoquel dermatology product still growing double-digits after 12 years
- Expanding addressable market as more pets receive advanced treatments
- International expansion opportunities in developing markets
- Livestock growth driven by rising population and protein demand globally
Market Dynamics and Opportunities
- COVID-19 accelerated pet ownership trends permanently
- Aging pet population requiring increased healthcare
- Rising standards of living in developing markets driving livestock protein demand
- OECD data shows meat, dairy, and fish consumption rising fastest globally
- Multiple expansion potential as pets receive human-like medical care
Valuation and Investment Rationale
- Stock now trades below Russell 1000 Growth Index valuation after years above market
- Current P/E multiple at 10-year lows despite improved fundamentals
- Underperformed indices over 1-, 3-, and 5-year periods after earlier outperformance
- Company is “much larger, more profitable” while growing at similar rates
- Valuation compression primarily due to market sentiment, not fundamentals
Market Context
- Industry previously overvalued during COVID-19 pet stock mania
- Private equity also inflated veterinary practice valuations during this period
- Current opportunity represents market losing interest after earlier excessive enthusiasm
- Similar to AI stock enthusiasm pattern observed more recently
Investment Philosophy Alignment
- Exemplifies Wedgewood’s approach of buying quality companies during unfavorable periods
- Allows benefit from both business compounding and potential valuation expansion
- Represents “relatively unknown stock” opportunity despite large-cap status
- Long-term fundamental drivers remain intact while valuation has normalized
Other Key Points
- Part of broader animal healthcare industry with steady secular growth
- Benefits from both demographic trends (pet ownership) and economic development (livestock)
- Lower-risk R&D model compared to human pharmaceuticals
- Strong competitive moat through product portfolio and global distribution
Wedgewood Partners views Zoetis as a high-quality business available at an attractive valuation after years of market disinterest. They believe the combination of strong secular growth drivers, improved profitability, and normalized valuations creates an opportunity for both earnings compounding and multiple expansion over their long-term investment horizon.
