What’s Next For Elanco Stock After Kindred Acquisition?

[Updated: 6/25/2021] Elanco Update

We believe that the stock price of Elanco (NASDAQ: ELAN), a pharmaceuticals company focused on medicines for pets and livestock, has more room for growth from its current levels of $35. ELAN stock is up 2x from the levels of around $17 it was at on March 23, 2020, when broader markets made a bottom. This marks a slight outperformance compared to the broader markets with the S&P 500 rising 90% over the same period. The outperformance of ELAN stock can partly be attributed to upbeat results over the recent quarters, and new product approvals.

Looking at a longer time period, ELAN stock is up only 12% from the levels of around $31 seen toward the end of 2018 (vs. an S&P 500 rise of nearly 70%). Much of this underperformance can be attributed to a decline in the company’s revenue-per-share. Elanco’s total revenue grew 26% to $3.9 billion over the last twelve month period, compared to $3.1 billion in 2018. The revenue rise can largely be attributed to the impact of Elanco’s acquisition of Bayer’s animal health business last year. The company saw a large 65% rise in total shares outstanding due to share issuances, partly for Bayer’s animal health business acquisition.

As such, on a per share basis, Elanco’s revenue declined 24% to $7.59 for the last twelve month period, compared to $9.93 in 2018. Given a 24% decline in RPS over the recent years, Elanco’s P/S multiple has contracted 4% to 4.7x currently, compared to levels of 4.9x seen in 2018, and we believe that the multiple will expand going forward. Our dashboard, ‘What Factors Drove 12% Change In Elanco Stock between 2018 and now?‘, has the underlying numbers.

Outlook

While there is an increased competition in the animal health business, with the likes of Merck and Zoetis, Elanco has resorted to acquisitions to gain market share. After Bayer’s animal health business acquisition last year, the company last week announced the acquisition of Kindred Biosciences, a biopharmaceutical company that develops novel pet therapeutics, for $440 million. This acquisition was made at a large premium of over 50% to Kindred’s stock value. However, the acquisition makes sense for Elanco, given that it will allow the company to expand in the lucrative pet dermatology market, which was around $3.6 billion in 2020.

On the flip side, there are certain short-term concerns, as the company decided to sell three of its manufacturing sites, and record an impairment charge of $245 million to $305 million in Q2. While this decision will result in a near-term hit on earnings, it will likely result in improved margins over the coming years.

Looking at the valuation, Elanco, at the current price of $35, is trading at 3.8x its expected RPS of $9.25 for 2021, in-line with the levels of under 4x seen over the recent years. However, with the new acquisitions, the company can look forward to better earnings growth over the coming years, and the company is likely to see an expansion in its multiple, boding well for ELAN stock, in our view.

[Updated: 3/2/2021] ELAN Stock Rise

The stock price of Elanco (NASDAQ: ELAN), a pharmaceuticals company focused on medicines for pets and livestock, has seen a solid 13% rise over the last ten trading days, while it’s up 9% over the last five trading days, but we believe the stock, after the recent rally, may trend lower in the near term. The recent rise can largely be attributed to the company’s better than expected Q4 results, with earnings of $0.12 (vs. $0.09 consensus) and revenues of $1.14 billion (vs. consensus of $1.06 billion). The company’s guidance for Q1 and full year 2021 was also ahead of the consensus estimates. The company also reported new product approvals in the U.S., Canada, and Europe. Furthermore, some of the analysts have raised their outlook for ELAN stock, aiding the overall stock rise.

Looking at the recent rally, the 13% rise for ELAN stock over the last ten days compares with 2.4% drop seen in the broader S&P 500 index. Now, is ELAN stock poised to gain further? It doesn’t look that way. Based on our machine learning analysis of trends in the stock price over the last few years, we believe that there is a strong chance of a drop in ELAN stock over the next month (twenty-one trading days). After the recent rally, ELAN now trades at levels of around $33, which is also the consensus analyst average price for the stock. See our analysis on Elanco Stock Chances of Rise for more details. Curious about the possibility of rising over the next quarter? Check out the ELAN Stock AI Dashboard: Chances Of Rise And Fall for a variety of scenarios on how ELAN stock could move.

Five Days: ELAN 9.2%, vs. S&P500 -2.2%; Outperformed market

(2% likelihood event)

• Elanco Animal Health Incorporated stock rose 9.2% over a five-day trading period ending 2/26/2021, compared to the broader market (S&P500) decline of 2.2%
• A change of 9.2% or more over 5 trading days is a 2% likelihood event, which has occurred 29 times out of 1249 in the last five years

Ten Days: ELAN 13%, vs. S&P500 -2.4%; Outperformed market

(7% likelihood event)

• Elanco Animal Health Incorporated stock rose 13% over the last 10 trading days (2 weeks), compared to broader market (S&P500) decline of 2.4%
• A change of 13% or more over 10 trading days is a 7% likelihood event, which has occurred 95 times out of 1240 in the last 5 years

[Updated: 1/13/2021] ELAN vs. ZTS

We think that Elanco Animal Health (NYSE: ELAN) currently is a better pick compared to Zoetis (NYSE: ZTS). ELAN stock trades at about 5x trailing Revenues, compared to around 12x for Zoetis. Does this gap in Elanco’s valuation make sense? We don’t think so. While Elanco’s business has been impacted in 2020 due to economic headwinds from the pandemic, Zoetis has been more resilient in the current crisis. This can be attributed to Zoetis’ higher reliance on companion animals, which is a stable and high margin business compared to livestock, the major revenue source for Elanco. However, Elanco has recently completed its acquisition of Bayer’s animal health business, resulting in a ramp up in its companion animals business. There is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue Growth as well as Operating Income and Operating Margin growth. Our dashboard Zoetis vs. Elanco: ZTS stock looks overvalued compared to ELAN stock has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Zoetis’ Revenue grew 29% from $4.9 billion in 2016 to $6.3 billion in 2019, aided by price and volume gains as well as contribution from the Abaxis acquisition in 2018. The revenues stood at $6.5 billion for the last twelve month period. Looking at Elanco, total Revenue grew 7% from $2.9 billion in 2016 to $3.1 billion in 2019. However, the revenue for the last twelve months was down over 6%, impacted by the economic headwinds due to the pandemic.

2. Operating Income

Zoetis’ operating income grew from $1.4 billion in 2016 to $2.0 billion in 2019, reflecting a 43% growth, led by both an increase in revenues and expansion of operating margins, which grew from 28.5% to 32.3% over the same period. Looking at Elanco, the operating income grew from $-22.4 million to $157.1 million between 2016 and 2019. Elanco also saw expansion of margins from -1% to 5.1% over the same period. However, as we look at the last twelve months figures, the operating margin for Zoetis has improved to 34.3% while that for Elanco has plunged to -9%, owing to increased costs during the pandemic.

The Net of It All

Although Zoetis’s Revenue growth, operating income, as well as operating margin, compares favorably with Elanco over the recent years as well as over the last twelve months period, Elanco’s acquisition of Bayer’s animal health business is a big positive. Elanco can not only look forward to steady revenue growth, but also see its margins expand given that the companion health business garners higher margins. As such, we think the difference in P/S multiple of 12x for Zoetis versus 5x for Elanco will likely narrow going forward, implying ELAN stock could offer better growth in the near term.

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