InvestorsHub Logo


09/11/20 2:54 PM

#29 RE: DewDiligence #27

Barron’s likes post-merger ELAN—but the stock is not a screaming buy (IMO):

Elanco Animal Health shares are up about 15% since the company closed its nearly $7 billion acquisition of Bayer Animal Health in early August. That rally has been a long time coming for investors in the animal-care company.

Elanco (ticker: ELAN) stock was down about 2% from when it was spun out from Eli Lilly (LLY) two years ago until the Bayer acquisition became official. Now, Elanco has a good opportunity to change the trajectory of its stock performance, in part because it will have more global reach with the Bayer unit in the fold. The acquisition catapults Elanco into the No. 2 spot in animal-health market share, behind Zoetis (ZTS)…

Companion animal, or pet, products, including canine treatments for heartworm and osteoarthritis, are for the most part faster-growing with higher margins than many livestock products. …A big plus from the Bayer deal: It increases Elanco’s exposure to pet products to 48% of sales from 38%.

…One of the less favorable consequences of the Bayer deal is that Elanco now has a lot of debt on its balance sheet. Risinger estimates that the company’s net debt to 2021 earnings before interest, taxes, depreciation, and amortization is a hefty 5.2 times

Elanco fetches about 27 times the $1.02 a share that analysts expect the company to earn next year, a big discount to about 38 times for Zoetis. Elanco probably won’t close that valuation gap soon, considering that Zoetis has better organic sales growth, which excludes acquisitions, and a stronger balance sheet. But it certainly could narrow the gap and give its stock price a nice boost.

In other words, ELAN may be a better buy than ZTS, but it’s not exactly cheap.