Merrill Lynch issues bullish forecast on animal health giants Zoetis and VCA

Dog and cat
America's love of its pets will drive up shares of Zoetis and VCA, Merrill Lynch predicts.

Animal health has long been considered a safe investment, because even during tough economic times, most pet owners don’t scrimp on spending when it comes to keeping their dogs and cats healthy. And the food side of the business is strong, too, as the growing ranks of middle-class consumers around the world boost the demand for beef, fish and other sources of protein.

That’s the bottom line of a new report from Bank of America’s Merrill Lynch. The firm is bullish on the animal health sector overall, and it has issued two “buy” ratings on shares of drugmaker Zoetis ($ZTS) and hospital chain VCA ($WOOF), according to the investing site 24/7 Wall St.

“Animal health is a more stable and defensive sector than human healthcare, and benefits from favorable demographic and secular trends,” the report says, according to 24/7 Wall St. “New product launches and further margin expansion opportunity drive our valuation,” it adds. Merrill Lynch confirmed to Fierce Animal Health that it had issued the recommendations to investors but declined to release the full report publicly.

The firm has a $60 price target on Zoetis, which is currently trading around $51 a share. Similarly, it values VCA at $78, which is also a $9 premium to its current price.

Merrill Lynch calls Zoetis a market leader in animal health and points out that its product mix and geographic presence closely aligns the company with the industry as a whole, according to 24/7 Wall St. And because none of its products account for more than 30% of total sales, the company is well diversified, Merrill Lynch says.

Indeed, it has been a good year for Zoetis. In August, the company announced second-quarter earnings results that beat expectations, and it bumped up its forecast for the year, telling analysts to expect sales to come in between $4.8 and $4.9 billion and adjusted earnings per share to range from $1.86 to $1.93.

Zoetis has also diversified its product mix with strategic acquisitions. It got into the fast-growing market for fish vaccines by buying Pharmaq for $765 million. It has also been expanding into diagnostics, buying Scandinavian Micro Biodevices for $80 million and picking up several devices when it bought up Abbott’s ($ABT) animal health assets for $255 million in 2014.

As for VCA, it has also exceeded expectations on the Street this year. In July, the veterinary hospital chain announced double-digit sales and earnings growth, and it bumped up its full-year revenue forecast to $2.52 billion to $2.54 billion. Merrill Lynch points out that the company is also one of the biggest providers of veterinary laboratory services in the U.S.

The animal health industry is valued at more than $50 billion a year and has grown about 5% to 6% annually for the past decade, Merrill Lynch estimates. The firm predicts that growth rate will be sustainable going forward.

- read more at 24/7 Wall St.

Special Report – Top 10 Animal Health Companies of 2015 – Zoetis

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