Zoetis Inc. (ZTS) and Chewy, Inc. (CHWY) are two prominent players in the pet care industry. ZTS develops, manufactures, and markets veterinary vaccines and medicines, complemented by diagnostic products and genetic tests and supported by various services. In contrast, CHWY operates an online platform to sell pet food, medications, and other pet-related products.
A significant increase in pet adoption amid the pandemic, as people spent much more time at home, has led to greatly increased spending on pet food and medications. As the spending on pets grows, companies in this space are accelerating their research and development to benefit from the rising demand for drugs, vaccines, diagnostic devices, and pet-friendly products and services. As a result, the global pet care market is expected to grow at 5.2% CAGR to $255.40 billion by 2027. Investor optimism toward this sector is evident in the ProShares Pet Care ETF’s (PAWZ) 7.9% gains over the past three months, compared to the SPDR S&P 500 Trust ETF’s (SPY) 4.6% returns. Thus, both ZTS and CHWY should benefit from the industry tailwinds.
While CHWY’s stock price has lost 8% year-to-date, ZTS’ has surged 20.9%. In terms of their past six months’ performance, ZTS is a clear winner with 22.5% gains versus CHWY’s negative returns. But, which of these stocks is a better pick now? Let’s find out.
On June 1, 2021, ZTS expanded its portfolio of horse care products with the addition of Pro-Stride APS, Restigen PRP, and CenTrate BMA, a range of devices designed to help address injuries common in horses that may cause lameness. These devices are expected to gain widespread acceptance across the horse health and well-being market. The company plans to sell these products to veterinarians through key distributor partners.
On May 21, 2021, CHWY introduced a series of features on its popular telehealth service—Connect with a Vet. Features such as Video consultation, pre-scheduling a virtual vet consultation, and extended availability even on weekends should enhance customers and veterinarians experience. The company hopes to see high demand for its service because pet health check-ups and medications have been increasing in the pet industry over the past year.
Recent Financial Results
ZTS’ revenue for its fiscal year 2021 first quarter ended March 31, 2021, increased 22% year-over-year to $1.87 billion. The company’s non-GAAP gross profit increased 23.1% year-over-year to $1.33 billion. Its non-GAAP operating income came in at $744 million, up more than 36% from the prior-year period. While its non-GAAP net income increased 32.5% year-over-year to $603 million, its non-GAAP EPS increased 32.6% year-over-year to $1.26. As of March 31, 2021, the company had $3.60 billion in cash and cash equivalents.
For its fiscal first quarter, ended May 2, 2021, CHWY’s net sales increased 31.7% year-over-year to $2.14 billion. Its gross profit came in at $589.78 million, up 55.7% from the prior-year period. Its income from operations has been reported at $39.12 million for the quarter, compared to a $47.49 million loss in the prior-year period. CHWY’s adjusted net income came in at $63.49 million, versus a $5.53 million loss in the year-ago period. Its EPS has been reported at $0.15, compared to a $0.01 loss per share in the prior-year period. The company had $637.53 million in cash and cash equivalents as of May 2, 2021.
Past and Expected Financial Performance
ZTS’ revenue has grown at 10.6% over the past year. Analysts expect ZTS’ revenue to increase 13.8% year-over-year in the current year and 7.8% next year. Its EPS is expected to increase 17.4% in the current year and 12.2% next year. The stock’s EPS is expected to grow at a 12.5% rate per annum over the next five years.
In comparison, CHWY’s revenue grew 42.9% over the past year. Analysts expect CHWY’s revenue to increase 25.2% year-over-year in the current year and 21% next year. Its EPS is expected to increase 152.2% in the current year and 208.3% next year. Analysts expect the stock’s EPS to grow at a 132.1% rate per annum over the next five years.
CHWY’s trailing-12-month revenue is 1.1 times ZTS’. However, ZTS is more profitable, with a 35.9% EBIT margin versus CHWY’s negative value.
Also, ZTS’ ROA and ROTC values of 12.4% and 15.1%, respectively, compare favorably with CHWY’s negative values.
In terms of non-GAAP forward P/E, CHWY is currently trading at 587.28x, which is 1243.3% higher than ZTS’ 43.72x. In addition, CHWY’s 216.20x non-GAAP forward PEG is 6166.7% higher than ZTS’ 3.45x.
Also, in terms of forward EV/EBITDA, CHWY’s 156.71x is 417.7% higher than ZTS’ 30.27x.
Thus, ZTS is the more affordable stock.
While CHWY has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, ZTS has an overall A grade, equating to Strong Buy. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
ZTS has a C grade for Value, which is consistent with its slightly higher-than-industry valuation ratios. ZTS’ 33.93x trailing-12-month EV/EBITDA value is 56.7% higher than the 21.66x industry average. However, CHWY’s D grade for Value reflects its overvaluation. The company has a 1264.28x trailing-12-month EV/EBITDA, which is 9492% higher than the 13.18x industry average.
In terms of Quality, ZTS has been graded a B, which is consistent with its higher-than-industry profitability ratios. ZTS’ 35.9% trailing-12-month EBIT margin is 2641.5% higher than the 1.3% industry average. In comparison, CHWY has a C grade for Quality, which is in sync with its negative EBIT margin.
Beyond what we’ve stated above, our POWR Ratings system has also rated CHWY and ZTS for Growth, Sentiment, Momentum, and Stability. Get all CHWY ratings here. Also, click here to see the additional ratings for ZTS.
Both ZTS and CHWY are well-positioned to benefit from the growing pet industry based on their market reach. However, we think that better profit margins and relatively lower valuation make ZTS a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical – Pharmaceuticals industry, and here for those in the Consumer Goods industry.
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ZTS shares were trading at $200.88 per share on Thursday morning, up $2.84 (+1.43%). Year-to-date, ZTS has gained 21.90%, versus a 17.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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