How a demerger from Pfizer revived this drug maker’s animal spirits

The separation enabled Zoetis to throw all its energies into its own specialism in animal drugs and the results are plain for all to see

At a time when investors can’t decide whether they fear inflation or recession more, here’s a stock to offer protection against both.

It’s not hard to see why Zoetis, which makes treatments for animals, fits the bill: pet owners are often said to be prepared to go hungry themselves when times are hard rather than let their cat or dog suffer, while if you have a sick pet you are unlikely to argue about the cost of something that will make it better.

The urge to treat animals as if they were human is sometimes called “humanisation” and according to Gerrit Smit, whose Stonehage Fleming Global Best Ideas Equity fund has a stake in Zoetis, the humanisation of pet care is “one of the strongest structural growth themes around – it is especially big in Britain and America but is picking up everywhere”.

He says it has a “long way to go” and the companies involved should be “compounding their organic growth at a double-digit rate for many years”.

Zoetis is well placed to benefit from the trend. As a large, global specialist in animal treatments it has few rivals and it makes excellent margins and returns on capital thanks to its wide range of proprietary drugs, the result of a long-standing culture of innovation and an emphasis on research and development.

It inherited this culture from Pfizer, the pharmaceuticals giant from which it was spun out in 2013.

“Zoetis has stuck by that commitment to R&D, on which it spends 7pc of sales, but the demerger has also re-energised it,” Smit adds.

“It has moved into new areas such as animal diagnostics, which allows it to make more from its existing relationships with vets. It has even started to sell pet insurance. These are really logical developments but it’s encouraging to see how the company is evolving.”

He says the separation from Pfizer turned out to be “a really good value unlocker”. Since the demerger Pfizer’s share price has risen by about 165pc (or an average of 16pc a year) but Zoetis has gained about 790pc (26pc a year).

“This illustrates what can happen when a company is able to focus and its management can throw its energies into developing its full potential. And there’s no reason to think that this process is over,” Smit says.

Despite that astonishing share price appreciation he says he doesn’t consider the company to be overvalued.

“The share price started low – investors didn’t really understand Zoetis as an independent business when it demerged so many of them sold. The stock trades at 34 times this year’s forecast earnings: this is high, although it has been a lot higher as the shares have fallen by about 30pc from their peak, and this is a stock that deserves a good rating. We expect it to deliver double-digit earnings growth and there are not many stocks in which we have such a high level of conviction.”

That said, it’s always possible that “the market could suffer another knock” so Smit says investors will need to take a long-term view. “This is not a tactical trade but a classic buy-tohold candidate,” he says.

Questor says: buy

Ticker: NYSE: ZTS

Share price at 5:45pm: $175.40

Update: Accenture

Since we tipped this IT consultancy in September last year, again after a conversation with Gerrit Smit, the share price has fallen by 16.7pc.

It is hardly alone in that, in view of the move away from growth and tech-related stocks, and Smit says he is “just as optimistic as before”.

“We still hold the stock. We perceive it as really good value at the moment. The main case for Accenture – that it is one of the best sources of advice for businesses as they seek to make the most of technology – is very much on track,” he says.

“I felt some apprehension when some of the other big auditors said they were thinking of spinning off their own consultancy arms into separate businesses because I feared that as standalone companies they could be attractive to Accenture’s staff – its key asset in what is very much a people business. But all of the auditing firms have now shelved those plans so that fear has gone away.” Hold.