Animal health company Zoetis (NYSE:ZTS) has been something of an investor darling since it was spun off from Pfizer in early 2013. Shares are up 382% since the close of the stock's first day of public trading about seven years ago.

Zoetis' popularity with growth investors is rooted in two important trends: the humanization of pet care and the increase in global demand for animal protein. These tailwinds have been propelling the growth of Zoetis' business and will continue to do so for years, but is the stock a good buy today?

Business and recent results

Zoetis, a global leader in animal health, is on track to report over $6 billion in revenue for 2019 from its two segments, companion animal products and livestock.

The companion animal business has been the main driver of growth, riding the increasing propensity by owners to spend more on their pets and the global growth of the middle class. The livestock business has had more growth challenges recently but does benefit from a growing global population that is driving demand for animal protein that increases about 1% to 2% per year.

Vet holding a puppy and a kitten.

Image source: Getty Images.

In the first nine months of 2019, sales increased 7.6% to $4.59 billion, and adjusted earnings per share increased 17% to $2.73. The top-line growth all came from the companion animal segment, 46% of the total, which had a sales increase of 24% excluding currency effects. Sales of livestock products, though, fell 1%.

The growth of the pet segment was boosted by new products in parasite killers (parasiticides), market share gains in dermatological products, and gains in diagnostic products as a result of the company's acquisition of Abaxis last year.

The livestock business has been affected by the African swine fever outbreak in Asia as well as challenging market conditions in the domestic cattle industry, but both of those issues should eventually be resolved. A longer-term issue is pricing pressure in the livestock segment, which Zoetis says reflects a lack of innovation in the space that it hopes to reverse with some products it has in the pipeline.

Growth opportunities

Zoetis says that its traditional market segments are growing at a pace between 4% and 6%, and the company expects to beat that growth rate through innovation. One opportunity that the company is pursuing is to increase its market share in parasiticides, where it's only No. 4 in market share. This quarter, the company is launching a three-way parasiticide for dogs, Simparica Trio, which it thinks will add about 2 percentage points of growth to 2020 revenue.

One potentially lucrative opportunity is treatment of pain from osteoarthritis in cats and dogs. Zoetis has begun the filing process for drugs based on monoclonal antibodies, the same technology used in Humira, the human arthritis treatment that's the world's top-selling drug. Pain in cats is an area that's virtually unmet by drugs on the market today.

Longer term, the company's investments in biologic drugs could help it renew growth in the livestock segment as well. Global consumers are increasingly wary of antibiotics in the food supply, and government agencies are restricting their use. Zoetis is developing biologic alternatives to antibiotics, such as immunotherapies that can treat illnesses in livestock while sidestepping concerns about an impact on human health.

Zoetis also hopes to boost its livestock business by building digital solutions it calls "precision livestock farming." The company's dairy cow monitoring system called Smartbow uses motion detectors attached to the animals' ears that can detect patterns that indicate health problems or even when a cow is in heat.

A quality business at a very high price

Investor optimism about Zoetis' business powered the shares higher by 56% in 2019. The midpoint of the company's latest guidance for adjusted EPS for the year implies an increase in earnings of about 15% for the year.

Clearly the market loves the trends in the companion animal market and Zoetis' execution and investments in growth. Putting that together, the company gives investors an opportunity to invest in fairly predictable growth, something that growth stock investors are usually willing pay up for. But that enthusiasm has driven up the valuation of the stock to near the top of its range in recent months.

Graph of Zoetis 3-year P/E

ZTS P/E data by YCharts.

Zoetis is an attractive growth business, but the stock is less attractive at its current level. Investors with a long time horizon might consider starting a small position now, but I think that with a little patience, they'll find a better entry point in the months ahead. There are also other stocks in the same industry which may be better opportunities right now.