Please ensure Javascript is enabled for purposes of website accessibility

Is Elanco Stock a Buy?

By David Jagielski - Updated Feb 25, 2020 at 9:49AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company recorded a profit of $67.9 million for 2019. Investors may be wondering what's next for the animal health stock.

Elanco Animal Health (ELAN -1.21%) has been trading on the markets for less than two years, and on Feb. 19, the company reported its first full-year results since it separated from Eli Lilly (LLY 2.10%)

The stock has a more modest market cap of $12 billion compared to Lilly's mammoth $136 billion valuation. But a lower valuation doesn't necessarily make Elanco a better investment, as it'll have to prove to investors that its growth opportunities are strong enough to make it a good buy. Let's take a look at where the company is today and whether investors should consider buying shares of the animal health company.

Elanco's recent earnings results were unimpressive

In the company's fourth-quarter results, the numbers were simply not impressive. Elanco reported a 2% decline in its top line with revenue of $787 million, down from $799 million in the prior-year quarter. The company finished the quarter in the red with a net loss of $9.5 million, which compared negatively to the previous year. However, in 2018, Elanco benefited from an income-tax benefit of $18.6 million which propped up its bottom line in Q4, pushing it into the black with a total profit of $16.4 million.

Puppy sitting in bowl of dog food

Image source: Getty Images.

For the full year, Elanco recorded a profit of $67.9 million on revenue of $3.07 billion, for a net margin of 2.2%. In the prior year, Elanco's margin was slightly higher at 2.8% of revenue.

Is there enough growth for investors?

With no growth in the top or bottom lines, investors wonder if there will be any improvements in future quarters. In the company's earnings release, Elanco reaffirmed the guidance for the 2020 fiscal year that it gave in January, saying it still expects revenue to fall between $3.05 billion and $3.11 billion. 

However, that guidance means at best, sales growth will be just 1.3%, and at worst it will be another year of sliding sales. And with margins very small, that's likely not going to translate into much growth in earnings per share, either. The one saving grace is that Elanco could become a much bigger company, very soon.

In August, Elanco acquired the veterinary drugs unit of Bayer (BAYN -0.07%) for $7.6 billion in a cash-and-stock deal. The move would make Elanco one of the largest manufacturers of medicine for pets. According to researchers, the animal health industry is worth $44 billion and is expected to grow at an annual rate between 5% and 6%. 

Elanco expects the deal to accelerate the company's growth, and that by the third year, it will generate operating cash flow of close to $1 billion. It also expects the deal to achieve synergies totaling between $275 million and $300 million. 

Is Elanco overpriced?

Currently, Elanco is trading at a forward price-to-earnings ratio of 26. Given the stock's lack of growth, it's a hefty price tag for investors to pay today. Even if we look further ahead and factor in its expected five-year earnings growth, by using the price-to-earnings-growth ratio, the stock still trades at a fairly high PEG of around three (growth investors typically look for a multiple of around one or less).

In 2019, shares of Elanco fell 6.6% while the Health Care Select Sector SPDR Fund rose 18%. Even with the decline, the stock is still a bit of an expensive buy.

Investors should pass, for now

Elanco doesn't offer investors any attractive reason to hold the stock today. While the deal with Bayer may pay off over the long term, investors may be better off waiting to see what the company's updated numbers look like once the two are fully integrated. Elanco expects the deal to close in mid-2020.

Without a dividend, there's not even an incentive for investors to hang on and wait. And lackluster earnings results thus far will ensure that the healthcare stock isn't going to have a much better year in 2020 than it did in 2019.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Elanco Animal Health Incorporated Stock Quote
Elanco Animal Health Incorporated
$18.85 (-1.21%) $0.23
Eli Lilly and Company Stock Quote
Eli Lilly and Company
$316.82 (2.10%) $6.51
Bayer Stock Quote
$53.50 (-0.07%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.