Four top plays on pet health
The leading companies have differing growth rates, but most are fairly high. Revenue growth rates for the three years from 2018 to 2021 are Zoetis 33.6%, Elanco 55%, Idexx 37.5%, Virbac 22%, Philbro 1.6% and Dechra 49.3%. Vetoquinol grew at 21.4% from 2017 to 2020. Elanco’s growth was boosted by the Bayer deal and Dechra’s by several acquisitions.
The price/earnings (p/e) ratios are also correspondingly high, led by Zoetis (35.4 for 2022 and 31.6 for 2023), Idexx (53.2 and 45.8) and Dechra (48.9 and 44.6). These reflect their higher growth rates. Others are lower, though few are actually low: Elanco is on 21.2 (2022) and 17.4 (2023), Virbac on 31.2 (2022) and 28 (2023), Philbro is on 15.1 (2022) and 15.4 (2023) and Vetoquinol on 23.5 (2022) and 21.8 (2023).
There are two ways of assessing higher p/e ratios. The first is to look at the price/earnings/growth (PEG) ratio for a company – that is the p/e ratio divided by the earnings growth rate. A PEG of one or less usually denotes good value. Looking at Zoetis, its earnings per share (EPS) grew by 24.7% from 2020 to 2021. With a 2021 p/e of 39, the PEG is 1.6 – quite high.
The second method is to estimate earnings growth over five years and see what the p/e would be. Zoetis is by far the largest veterinary pharma company so it is likely to grow at least as fast as the market. Taking the forecast compound annual growth rate of 15% for ten years, Zoetis’s 2021 EPS of $4.67 would grow to $9.40 after five years. At the current share price of $182.8, that would put it on a forecast p/e of 19.4. The question is whether the market would still grant a p/e of, say, 35 to Zoetis in 2026, since 15% per year growth is forecast to continue. If so, the share price would rise to $330-plus, which gives a reasonable profit over five years. A cautious investor might invest in
Zoetis (NYSE: ZTS) at a recent price of $188 as the market leader. Elanco
(NYSE: ELAN) at $25.7, has the highest R&D/sales ratio, a reasonable p/e and decent revenue growth. Risk-tolerant investors might consider Idexx
(Nasdaq: IDXX) at $504 and Dechra (LSE: DPH) at 3,842p. These two firms have the highest proportion of highergrowth pet sales, R&D/sales ratios above 5% and strong revenue growth. Dechra’s interim results last month showed operating profit up 15.9%.