The animal health space is one of the most promising and rewarding industries for investors to be in. Advances in animal health and pet diagnostics, along with the growing e-commerce trend, provide plenty of opportunities for investors to profit.
Elanco Animal Health (NYSE:ELAN) is one of the largest and most established companies in the animal health industry. However, Elanco has failed to garner the same level of investor enthusiasm as peers Idexx Laboratories and Zoetis. Recently, Elanco reported earnings that again failed to excite investors. Should investors look for a turnaround here, or should they continue to avoid Elanco’s stock?
When Elanco reported Q2 2021 earnings, the financial figures were seemingly strong. Revenue growth hit the top end of the expected range and gross margin improved. Unfortunately, the company lowered its guidance for its earnings growth.
Elanco’s second-quarter revenue increased 118% year over year thanks to the Bayer acquisition and strong legacy portfolio growth of 28%. Additionally, gross margin rose 740 basis points to 56.9% due to operating synergies and the company’s aggressive cost-cutting program.
This is definitely a win for the company, although adjusted EBITDA guidance was lowered by $20 million due to underperformance in a key product launch, as well as a change in the UK’s tax code. This lower EBITDA brings down full-year earnings per share by $0.03-$0.06. While this news is nothing too major, Elanco’s mixed product performance and new SEC investigation are certainly cause for concern.
Mixed product performance
While many of the company’s portfolio segments and products performed well, two key things occurred during Q2 that Elanco investors should keep an eye in the coming quarters.
First, Seresto, the company’s flagship dermatology product, had year-over-year sales growth that was much lower than the prior quarter. When management was asked about this, they said that COVID-19 caused an unusual amount of demand for the product and that the company hasn’t been marketing it as much the past few months.
Regardless of the reason, future Seresto figures should be closely monitored, because it’s the largest revenue-generating product for the company and has caused an outcry among animal advocacy groups.
Second, one of Elanco’s new product launches, ZoaShield, hit the markets and brought in less revenue than expected. This was due to increased competition from competitors that released more of their products into the market, thus diluting demand. While it is early days for the new poultry drug, outperformance by competition is currently eating into the company’s top-line growth.
Signs investors should be cautious
Elanco has been able to produce top-line revenue growth and bottom-line margin expansion. However, the company faces several challenges with its product portfolio. Additionally, it disclosed an SEC investigation into its inventory and sales practices during its most recent earnings call. Overall, this paints a cautionary picture for the company. Investors interested in the animal health industry may want to focus on Idexx Labs or Zoetis, both of which have clearer growth opportunities ahead.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.