One of my favorite ways to add money to my portfolio is to invest in proven compounders with track records of delivering market-beating results after short-term pullbacks. This idea is especially true when the stocks in question are trading at what could prove to be once-in-a-decade opportunities.
Two companies that fit this description now are animal healthcare specialists Idexx Laboratories (IDXX 0.02%) and Zoetis (ZTS 0.94%). While Idexx is already one of my daughter’s core holdings and Zoetis is one of mine, I firmly agree that adding to your long-term winners over time is an outperforming proposition — a notion espoused by Motley Fool co-founder David Gardner.
Idexx and Zoetis are currently down 37% and 28%, respectively, from their all-time highs — yet they’re still beating the S&P 500 on a total-return basis over the past decade. Here’s why investors should consider picking up these two magnificent S&P 500 stocks as we head into 2025.
1. Idexx Labs
The Bureau of Economic Analysis estimates that people in the United States spent a total of $186 billion on their pets in 2023. This figure has roughly doubled since 2014, highlighting the “pet humanization” megatrend that should power these two stocks to new highs.
Idexx Labs should benefit thanks to its leadership position in pet healthcare diagnostics. With an installed base of over 144,000 instruments globally — a metric that grew by 10% year over year in its latest quarter — Idexx’s offerings detect a wide array of ailments facing our furry friends.
What makes it a top-tier stock to consider is that the company has built a powerful razor-and-blade model. Its large base of installed instruments constitutes the “razor.” That allows it to generate recurring purchases from products such as test cartridges, reference lab guidance (i.e., help interpreting test results), consulting services, and software subscriptions. These “blade” sales account for 80% of Idexx’s revenue.
Powered by the stability inherent to this model, Idexx’s shares have commanded a lofty valuation, trading at an average of 67 times free cash flow (FCF) over the past decade.
IDXX Price to Free Cash Flow data by YCharts.
However, as its sales growth decelerated from above 20% at the height of the pandemic-propelled pet adoption boom to below 7% today, the company’s price-to-FCF valuation has dropped to below 47, a level it hasn’t seen since 2016.
I believe this much more reasonable valuation helps make the stock a once-in-a-decade investment opportunity as Idexx leans into its newest growth market: oncology. It plans to expand its cancer testing panel over the next three years to detect roughly 50% of canine cancer cases.
With pet owners consistently opting for the early detection of cancer rather than being stuck with after-the-fact treatment, its expansion in this $2.5 billion market seems like a win-win for all involved.
And don’t just take my word that Idexx stock looks promising. Management recently announced it was adding 5 million more shares to its stock buyback authorization, which previously had 1.3 million shares remaining. The company has about 82 million shares outstanding, so this buyback could help meaningfully boost the stock price, which is down 37% from its high.
2. Zoetis
Whereas Idexx is the leader in animal healthcare diagnostics, Zoetis is the top dog in medicines, vaccines, genetic tests, and precision health products for pets and livestock. The animal healthcare behemoth generates 90% of its sales from categories where it considers itself to be the market share leader.
What makes it such a promising investment is that its dominance doesn’t just come from one or two medicines but rather 15 separate “blockbusters” that generate over $100 million annually each.
However — for the same reasons that applied to Idexx — Zoetis saw its sales growth rocket to over 20% in 2021, then dip to a minimal increase in 2022. That flattening of its growth trajectory prompted the market to cut Zoetis’ valuation dramatically. Today, it trades at 35 times FCF — far below its 10-year average.
ZTS Price to Free Cash Flow data by YCharts.
Now sitting at its lowest price-to-FCF valuation since 2019 and with its dividend yield back to nearly 1% — just below its all-time high — Zoetis looks like a once-in-a-decade opportunity as well.
ZTS Dividend Yield data by YCharts.
And its dividend looks entirely sustainable. As the company is using only 33% of its FCF to fund its payouts, Zoetis should easily be able to raise its dividend for the 12th consecutive year in a row — and beyond.
Best of all for investors, the company is seeing huge success in the osteoarthritis market with its new Librela pain medicine for dogs and Solensia for cats. These two drugs’ sales combined to grow by 97% in the company’s most recent quarter and are becoming popular options for pet owners looking to comfort their furry companions’ pain.
With the average life expectancies of dogs and cats up by 1.3 and 1.9 years, respectively, since 2010, osteoarthritis will only become a more common ailment for pets, expanding the market for those medicines.
Down 28% from its all-time high in 2022, Zoetis pairs perfectly with Idexx to form a duo of S&P 500 animal healthcare stocks poised to outperform the market for years to come.
