Pandemic Pets Push Industry Stocks to Pricey Valuations

The pet business has been among the great beneficiaries of the new coronavirus. That success has made some stocks in the sector expensive.

Among the sector's big winners this year are veterinary services firm Idexx Laboratories (IDXX), up about 61% this year, and drug company Zoetis Inc. (ZTS), which is 25% higher. The S&P 500 is up 8.7% for 2020. Investors will get a closer look at the companies in the coming weeks: Idexx (IDXX) is due to report third-quarter results Oct. 29, while Zoetis (ZTS) is due to report its results Nov. 5.

The pandemic has been accompanied by an uptick in pet ownership. A corresponding rise in the use of medicine and diagnostic tests for pandemic puppies and other pets is boosting revenue at animal-health companies. As working-from- home arrangements become more permanent for some, workers have more time to care for pets.

Michael Ryskin, an equity analyst at Bank of America, said he believes these trends will amount to a multiyear tailwind for the animal-health industry.

"The pet, or 'companion animal' industry, has been incredibly strong and resilient for many years, and despite fear of a negative impact from Covid-19, is having another strong year in 2020," he said.

This quarter Mr. Ryskin said he would be watching for whether the economic recession is curtailing some pet owners' spending, though he doesn't expect that to be the case.

Given the strength of the companies' stocks, investors will have to consider the risk of buying shares that trade at a premium to the rest of the market.

Shares of Zoetis (ZTS), are trading at about 40 times estimated 2021 earnings, said Jefferies analyst David Steinberg. Idexx (IDXX) trades at about 62 times 2021 expected earnings, Mr. Ryskin said. The S&P 500 trades at about 26 times expected earnings over the next 12 months, according to FactSet.

Mr. Steinberg said strong initial sales and the potential of Zoetis's (ZTS) Simparica Trio medicine, which protects animals against heartworm and other diseases, help justify the valuation. The company's highly anticipated feline-pain medication, which is expected to launch sometime in 2021, is another revenue driver to watch, he said.

Write to Veronica Dagher at veronica.dagher@wsj.com


  (END) Dow Jones Newswires
  10-14-20 0544ET
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