Zoetis Inc. (ZTS) investigates, develops, manufactures, and commercializes animal health medicines, vaccines, and diagnostic products in the United States and internationally. It commercializes products primarily across species, including livestock and companion animals. On the other hand, Freshpet, Inc. (FRPT) manufactures and markets natural fresh meals and treats for dogs and cats in the United States, Canada, and the United Kingdom. The company sells its products under the Freshpet brand; and Dognation and Dog Joy labels.

Pet adoption has increased significantly since last year due to the remote lifestyle. In April 2020, the national pet adoption rate jumped 34% year-over-year with the stay-at-home orders and the pandemic taking shape. As a result, the pet care market has grown substantially over the past 19 months, with surging demand for food, pet grooming products, and related products. The pet care market is projected to grow at a CAGR of 5.2% over the next six years to reach $255.40 billion in 2027. The industry’s growth should benefit both ZTS and FRPT.

ZTS has gained 28% over the past six months, while FRPT has slumped 14% over the period. Also, ZTS’ 23.2% gains year-to-date compares with FRPT’s loss of 3.5%. In terms of past year performance, FRPT is the clear winner with 32.8% gains versus ZTS’s 29.2%.

But which stock is a better buy now? Let’s find out.

Latest Developments

On August 4, ZTS announced its agreement to acquire Jurox, a privately held animal health company based in Australia, with additional regional offices and subsidiaries in New Zealand, U.S., Canada, and the UK. This acquisition should allow ZTS to strengthen its core business and aid its global expansion.

Recent Financial Results

ZTS’s revenue increased 26% year-over-year to $1.95 billion in the fiscal second quarter ended June 30. Net income stood at $512 million, up 36% from the same period last year. The company’s EPS increased 35% year-over-year to $1.07. Cash and cash equivalents balance rose 9.1% year-over-year to $3.66 billion in the six months ended June 30.

FRPT’s net sales increased 35.8% year-over-year to $108.62 million in the fiscal second quarter ended June 30. Its gross profit grew 27% from its year-ago value to $43.09 million, while its net income declined 4,985.6% year-over-year to a negative $7.48 million. The company’s EPS came in at a negative $0.17.

Past and Expected Financial Performance

ZTS’s EBITDA and revenues grew at a CAGR of 12.1% and 8.8% over the past three years, respectively. Analysts expect ZTS’s revenue to increase 13.8% in the current year and 7.8% in the next year. The company’s EPS is expected to grow 4.5% in the current quarter, 17.4% in the current year, and 12.2% in the next year. Moreover, its EPS is expected to grow at a rate of 12.5% per annum over the next five years.

On the other hand, FRPT’s EBITDA and revenues grew at CAGRs of 22.3% and 29.5% over the past three years, respectively. Analysts expect the company’s revenue to increase 37.7% in the current quarter, 36% in the current year, and 30.9% in the next year. The company’s EPS is expected to grow 66.7% in the current quarter, 200% in the current year, and 750% in the next year. Moreover, FRPT’s EPS is expected to grow at a rate of 106.2% per annum over the next five years.

Profitability

ZTS is more profitable with a gross profit margin and EBITDA margin of 69.64% and 41.50% compared to FRPT’s 40.45% and 4.30%, respectively.

Furthermore, ZTS’s ROE, ROA, and ROTC of 51.75%, 12.42%, and 15.06% compare with FRPT’s negative 3.28%, 1.05%, and 1.12%, respectively.

Thus, ZTS is more profitable.

Valuation

In terms of forward EV/Sales, ZTS is currently trading at 13.20x, 2.3% higher than FRPT, which is currently trading at 12.89x. However, FRPT’s forward EV/EBITDA ratio of 93.74 is 66.9% higher than ZTS’s 31.07.

POWR Ratings

ZTS has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. FRPT, on the other hand, has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ZTS has a grade of C for Momentum, justified as ZTS is trading slightly above its 50-day moving average. On the other hand, FRPT has a grade D for Momentum, justified as it is trading below its 50-day moving average.

ZTS has a grade of C for Value, while FRPT has a grade of F for Value. ZTS’s forward EV/EBIT ratio of 34.37 is 66.36% higher than the industry average of 20.66, in sync with its Value grade. In contrast, FRPT’s EV/EBIT multiple of 2,527.54 is 14,494.64% higher than the industry average of 17.32, consistent with its Value grade.

Of the 219 stocks in the Medical – Pharmaceuticals industry, ZTS is ranked #5. Alternatively, among the 81 stocks in the Food Makers industry, FRPT is ranked #75.

Beyond what we’ve stated above, we have also rated stocks for Stability, Sentiment, Quality, and Growth. Click here to view ZTS ratings. Also, get all FRPT ratings here.

The Winner

The stay-at-home orders due to the pandemic have led to a significant increase in pet adoption as people longed for companionship. This, in turn, has benefited the pet care companies significantly. This trend is expected to continue in the near term amid rising concerns regarding the Delta coronavirus variant. However, ZTS’s performance in the recent quarter and its better growth prospects compared to FRPT make it a better buy now.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Medical – Pharmaceuticals industry here. Also, here to view the top-rated stocks in the Food Makers industry.

ZTS shares were trading at $201.36 per share on Friday afternoon, down $2.48 (-1.22%). Year-to-date, ZTS has gained 22.19%, versus a 19.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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