2 Animal Health Stocks Still Look Attractive for Investors

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If there is one trend that has worked in America, it is the trend of betting on the public taking care of their pets. Now Merrill Lynch has issued a report on the state of animal health, with two Buy ratings.

One issue to consider here is that the animal health industry is now a $50 billion to $55 billion one that provides therapeutic products and veterinary services for the health and well-being of animals. Merrill Lynch points out that about 60% of the market is therapeutics via drugs and vaccines. It is important to differentiate that these are not just pets; it covers production animals like cattle, swine and pigs, as well as aquaculture.

Animal health as a whole has grown approximately 5% to 6% annually over the past decade. The firm is projecting that similar growth rates, or even better, will persist in the coming years. Note that Merrill Lynch’s research team stated going in that the animal health segment is not without controversy. Still, they feel that many of the headline risks are overblown.

Zoetis Inc. (NYSE: ZTS) was reinstated as a Buy rating with a $60 price objective (versus around $51.60 currently). The firm believes that Zoetis is grabbing animal health by the horns with roughly 16% market share. The report said:

Animal health is a more stable and defensive sector than human healthcare, and benefits from favorable demographic and secular trends. New product launches and further margin expansion opportunity drive our valuation, while headline risks (MFAs) seem manageable.

Since its IPO in 2013, Zoetis has been the clear market leader in the animal health space, with $4.8 billion in revenues in Fiscal Year 2015. By geography and species, Zoetis exposure is closely-aligned to the industry overall, and the company’s product type mix is one of the most diversified among the major competitors in the industry, with no single product type representing more than 30% of total sales.

The Merrill Lynch report also points out other large players. They said that Merck & Co. (NYSE: MRK) has 11% market share in animal health and is the second largest animal health company in the world, with over $3.3 billion in annual sales. Still, this is less than 10% of Merck’s parent company sales. Elanco, an Eli Lilly & Co. (NYSE: LLY) generated $3.2 billion in revenues in 2015, approximately 15% of the parent company revenues.

One other company also given high marks was VCA Inc. (NASDAQ: WOOF), which was reinstated with a Buy rating and $78 price objective (versus near $68.22 currently). VCA is the largest operator of animal hospitals and a leading provider of veterinary laboratory services in the United States, and Merrill Lynch sees industry trends and strategic initiatives bringing growth even when competitive threats exist.