Make no bones about it — Zoetis Inc (NYSE:ZTS) is one expensive stock. It even might be the most expensive health-care stock for its size. If you don’t believe me, run a stock screener for other companies of its size (at least $4 billion in annual revenue and $1 billion in EBITDA) with a trailing price-to-earnings multiple above 35. You’ll find fewer than 40 other stocks fitting the bill, none of them even remotely connected to health care.
Would buying Zoetis at the current price be foolish? Or could buying shares actually be Foolish (i.e., The Motley Fool kind of smart)? Here are three reasons — both foolish and Foolish — to buy this expensive stock.
1. Pets are multiplying like rabbits
You’d be foolish to buy Zoetis just because increasingly more people own pets and the company makes animal health products for those pets. For one thing, we need to question how much pet ownership really is on the upswing. The American Pet Products Association reported in 2008 that 62% of all U.S. households owned a pet, up from 56% in 1988. What is the figure for 2012? Still 62%. Of course, the number of households is growing, so pet ownership is actually increasing, albeit at a relatively slow rate.
The Foolish approach is to follow the money trail. While pet ownership might be growing at a snail’s pace, spending on pets is hopping along more quickly.
This represents a large market, of which Zoetis currently only captures less than 8% — and we’re not including the rest of the world. A Foolish reason to consider buying the stock is that the company’s status as the largest animal health business could position it to capture increasingly more of this growing market.
2. Steak and hamburgers really taste good
Another foolish reason to scoop up Zoetis shares right now is that you think demand for its products will soar because more people across the world will become as carnivorous as Americans. Everyone knows that rising middle classes in developing countries will want to eat more meat, right? More meat equals more need for Zoetis’ veterinary products to keep livestock healthy.
However, keep in mind that not even Americans are as carnivorous as Americans used to be. The U.S. Department of Agriculture reports that our annual consumption of beef and veal has been decreasing each year since 2007, except for a small uptick in 2012.
What about the rest of the world? The same trend holds true for China. Beef consumption in Europe, Mexico, and Russia has steadily declined with no upticks. There are areas of growth, though. India and Japan, for example, have experienced increases in beef consumption over the last five years. When we look at the total of all countries, however, the surprising fact is that beef consumption has been dropping.