\\TL;DR:\\ Zoetis at $77 is priced to \shrink\ 1.7% a year for the next
decade. It's the largest animal health company on earth, 72% gross
margins, 27% ROIC. If cash flow just goes flat and stays flat forever,
you make 7.9% a year. You are being paid for decay.
\\What Zoetis actually is\\
Spun out of Pfizer in 2013. The largest animal health company on
earth. 100+ countries, 14,500 employees, $9.5B revenue. They make
the drugs, vaccines and diagnostics your vet uses.
Two businesses:
\\Pets (\~70% of revenue).\\ Q2: $1.7B, down 6%.
\- Dermatology — Apoquel & Cytopoint, for dogs that won't stop
itching. $395M in Q2, DOWN 16%. This is the problem child.
\- Simparica Trio — monthly chewable, flea/tick/heartworm in one
\- Librela — monthly injection for arthritis pain in old dogs
\- Cerenia & Convenia — now facing generics
\- Diagnostics — $118M, UP 12%
\\Livestock (\~30%).\\ Q2: $731M, UP 11%. Cattle, poultry, swine,
fish. The part everyone ignores that is currently carrying the
company.
\\Why the margins are insane (71.7% gross)\\
No PBM. No insurance company. No Medicare price negotiation. No
patent cliff cliff-edge like human pharma. Your vet recommends it,
you pay cash at the counter, and you re-dose monthly. Pets are a
recurring revenue business where the customer feels guilty about
saying no.
\\Why it broke\\
That last part is the whole bear case. When money is tight, people
skip the vet. US clinic visits are down, pet owners are trading
down, and competitors showed up in derm and parasiticides at the
same time. US companion animal fell 11% in Q2. That's it. That's
the story. The business model didn't break, the consumer did.
\\The setup\\
\- $77.34, down 50% in 52 weeks, ATH was $233
\- Mkt cap $32B / net debt $7.6B / EV $39.5B
\- TTM FCF $2.32B on $9.53B revenue
\- Gross margin 71.7%, op margin 38.1%, ROIC 27.3%
\- 12.6x earnings, 13.8x FCF, 7.25% FCF yield
\- Buying back 4.2% of shares a year
\\Catalysts\\
\\Screwworm — nobody is modeling this.\\ New World screwworm is
moving north, confirmed in TX and NM. Zoetis has TWO FDA Emergency
Use Authorizations: May 19 2026 for livestock (cattle, horses,
swine, sheep, deer) and Aug 13 2026 for Simparica Trio in dogs.
Trio is the franchise bears say is losing share. An EUA gives it a
use case generics don't have, in both segments. Speculative and
EUAs are temporary, but it's free optionality.
\\New CFO/COO Jay Saccaro, started Aug 17.\\ 9 years as Baxter CFO,
then GE HealthCare CFO. Known for margin improvement and cash flow
optimization. Newly created role that ALSO owns global
manufacturing and supply. That's a restructuring mandate. He owns
capital allocation with the stock at 12.6x.
\\Q3, early November.\\ Guidance already cut to $9.12-9.32B / EPS
$5.55-5.65. The bar is on the floor. Any derm stabilization or US
clinic-visit recovery and this re-rates hard.
\\Buyback.\\ $3.65B repurchased TTM, 4.2% of shares gone in a year,
on a $32B cap. At 13.8x FCF every dollar spent is accretive. Even
at ZERO total FCF growth, per-share FCF compounds \~4%.
\\The insider buy that actually matters.\\ Chairman Michael
McCallister bought 3,000 shares on the OPEN MARKET on May 11 2026
at $77.72-77.80 through his family trust. \~$233k.
\\What kills it:\\ derm keeps bleeding, Trio faces real generic
entry, clinic visits don't recover. Then FCF declines 4%/yr and
this is worth $60.
\\The reverse DCF\\
Consensus WACC across six published sources is 7.2% (range 6.87-7.9%).
Take EV of $39.5B, unlevered FCF of $2.53B, 2.5% terminal growth, solve
for the growth rate that justifies today's price:
| WACC | Implied 10yr FCF CAGR |
|-------|----------------------|
| 6.87% | -2.5% |
| 7.2% | \\-1.7%\\ |
| 7.6% | -0.7% |
| 7.9% | 0.0% |
Flip it: hold growt