There's little doubt that Zoetis (ZTS 1.48%) is one of the world's leading pharmaceutical companies. However, it's probably not on the radar of most investors, because it focuses on animal health, making medicines and vaccines for livestock and pets, rather than serving the more familiar human health markets.

But its low-key status doesn't make the market opportunity any less profitable for the $42 billion company. In fact, Zoetis stock has outpaced the total return (stock gains plus dividends) of the S&P 500 by 198% to 94% since its 2013 spinoff from Pfizer. So far, it has created incredible wealth for long-term investors, especially those lucky enough to have earned shares from long-held positions in the parent company.

While there's still plenty of growth to look forward to in years ahead, is it enough to overcome Zoetis stock's sky-high valuation?

A head-on view of a black and white cow, with a blue sky in the background.

Image source: Getty Images.

A rock-solid foundation

Zoetis boasts a formidable lineup of animal health products in two core categories: livestock and companion animals. The livestock segment sells products for cattle, pigs, poultry, and fish, while the pet segment sells products for dogs, cats, and horses. Products include vaccines, anti-infectives, parasiticides, medicated animal feed, and diagnostic tools. Each animal group and product group reported year-over-year sales increases in the first nine months of 2018, which led to solid all-around performance in the first nine months of 2018. 

New product launches led to a 10% bump in revenue and a 16% increase in income before taxes, compared with the same period last year. The business grew its revenue in all 14 of its geographic regions. Meanwhile, lower tax expenses allowed even more of that income to flow to its bottom line, leading to a 38% year-over-year improvement in net income and a 63% increase in operating cash flow. 

This impressive performance allowed management to update its full-year 2018 guidance with just one quarter left in the fiscal year. Zoetis now expects annual revenue in the neighborhood of $5.8 billion and diluted earnings per share (EPS) of about $2.85, or income of roughly $3.11 per share on an adjusted basis. That compares quite favorably with $5.3 billion in sales and $1.75 of diluted EPS achieved in 2017. 

An aquaculture farm.

Image source: Getty Images.

A growth engine chock-full of potential

While the business is already firing on all cylinders, several noteworthy growth opportunities on the horizon suggest it hasn't yet peaked, offering opportunity for investors to get in on the fun.

For example, in the first nine months of 2018, the company's aquaculture (read: farmed fish) portfolio delivered year-over-year revenue growth of 16%, settling at $92 million. Although it only represents a small component of total revenue today, the incredible growth of the global aquaculture market -- responsible for more than 50% of all fish and seafood harvested each year -- could lead to double-digit growth for the next decade and beyond. That hints that the aquaculture portfolio could be an important growth driver by the mid-2020s.

Zoetis' aquaculture portfolio, largely created by the $765 million acquisition of PHARMAQ in late 2015, is also a prime example of management's track record of making smart acquisitions aimed at long-term growth.The $2 billion acquisition of Abaxis, which closed in July 2018, bolstered Zoetis' position in point-of-care veterinary diagnostics. Two-thirds of animal health diagnostics revenue that was generated in the first nine months of 2018 came in the third quarter, solely as a result of this acquisition. While Abaxis hasn't been a significant contributor this year, with just $69 million in total revenue, its portfolio is growing its sales at a double-digit clip year-over-year and is on pace to eclipse $200 million in revenue in 2019. 

Under-the-radar market opportunities aren't the only thing keeping the company's growth engine red hot. Zoetis and Regeneron Pharmaceuticals (REGN 0.48%) are collaborating to develop biologic drugs for animal health applications, or biotech drugs for cats and dogs suffering from inflammatory diseases, immune diseases, pain, and cancers. This joint venture makes a lot of sense for both parties. Zoetis could generate high-margin revenue from pet owners willing to spend whatever it takes to make their beloved pet comfortable, regardless of the state of the economy. Regeneron could diversfy its revenue stream and, more importantly, gain valuable data for its human-health pipeline in a market that has significantly less regulation. It's a win-win. 

Is Zoetis stock a buy?

It's not difficult to make a case for the long-term prospects of Zoetis. The company is comfortably profitable, growing at a healthy clip in recession-proof markets, and boasts multiple shots on goal in high-growth opportunities. While the growth potential is undeniable, so is the fact that Zoetis stock is very expensive. It trades at 28 times future earnings, 20 times book value, and 21 times enterprise value to EBITDA -- all significantly higher than its more traditional pharmaceutical peers. 

That said, comparing the animal health leader to human-health peers may not make much sense. A more apt comparison is Elanco Animal Health, which just made its debut on the stock markets in summer 2018. However, the smaller peer has a different portfolio mix and, following years of reshuffling assets, is still largely unproven in its current form. Essentially, there aren't any great head-to-head comparisons to make today.

Although the stock is rather expensive, investors who believe in the long-term growth potential of Zoetis may not hesitate to begin building a position in the company, especially if there's a pullback.