Elanco A Better Choice Than Zoetis?

by Trefis Team
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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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