Today, the quiet period for Eli Lilly spin-off Elanco Animal
Health (ELAN 32.01, -0.57, -1.75%) expired, allowing firms involved with its IPO to publish research
and estimates on the stock for the first time. As some may recall, its IPO was
quite successful, pricing above the expected price range ($24 vs. $20-$23) and
opening for trading with a sizable 34% opening pop. Investors were clearly
enthusiastic about the deal, which was underwritten and marketed by blue chip
investment banking firms Goldman Sachs, JP Morgan, and Morgan Stanley. Although
its top-line growth isn't spectacular, its strong market position,
profitability and cash flow generation made it an attractive option for
investors.
However, with the stock up 36% from its IPO price, it seems analysts aren't
quite as enthusiastic as investors were back when ELAN went public on September
20. Overall, initiations today came in mixed, with analysts generally not
expecting significant upside from here, based on their price targets.
With a 1-Year Forward P/E north of 35x, and modest growth expected, analysts
are likely seeing the stock as fairly valued at current prices. ELAN does have
its Q3 earnings report coming up soon on November 6 and if the company manages
to outperform expectations, sentiment in the analyst community could shift
quickly.
For the time being, though, today's quiet period expiration
doesn't provide much of a spark for ELAN shares, which have cooled off since
its hot start.
ELAN Overview
ELAN, which was spun off from Eli Lilly (LLY), is an animal health company
that makes health products for companion and food animals. Elanco is the fourth
largest animal health company in the world, with revenue of $2.9 bln last year. Globally, Elanco is #1 in
medicinal feed additives, #2 in poultry and #3 in cattle. It also has one of
the broadest portfolios of pet parasiticides in the companion animal sector.
Elanco offers a diverse
portfolio of more than 125 brands. Its vision is to enrich the lives of people
through food (making protein more accessible and affordable) and through pet
companionship (helping pets live longer, healthier lives). The food animal
sector focuses on species raised to provide animal protein, such as cattle,
other ruminants (sheep and goats), swine, poultry and aqua.
Over the past 10 years,
ELAN has transformed itself from a food animal focused company into a
diversified global company. In addition to its FA Ruminants & Swine
category, ELAN now has established positions in three targeted growth
categories: CA Disease Prevention, CA Therapeutics and FA Future Protein &
Health.
Recent acquisitions
include the animal health business of Janssen Pharmaceutica (a subsidiary of
J&J), ChemGen, Lohmann, the animal health business of Novartis AG and the
US feline and canine vaccines portfolio of BI Vetmedica. As a result of these
acquisitions as well as organic growth, ELAN has grown its companion animal
categories, from a minimal presence in 2007 to more than $900 mln in revenue in
2017.
The company is profitable on a non-GAAP basis. However, revenue growth is
pretty modest. In 2017, pro forma revenue declined 1% to $2.89 bln. In 1H18,
revenue grew 4.8% yr/yr to $1.51 bln. Adjusted EBITDA on a pro forma basis was
$498.9 mln in 2017. In 1H18, adjusted EBITDA rose 10% yr/yr to $306.2 mln.
Elanco also plans to pay a small quarterly dividend of $0.06/share.
Quiet Period Expiration
There was a flurry of activity this morning from analysts as the quiet
period expired. This is not unusual because the more substantial the IPO, the
more investment banks there will be involved. The big three that are probably
garnering the most attention are Goldman Sachs, Morgan Stanley, and JP Morgan's
initiations.
Both Goldman and Morgan Stanley took a more cautious approach,
going with a Neutral ($30 price target), and Equal-Weight ($35) price target,
respectively. Goldman's $30 price target, which is 8% below current prices,
certainly stands out. On the other hand, JP Morgan was one of the more bullish
firms out there this morning, assigning an Overweight and $38 price
target.
A few other notable initiations include Credit Suisse's Neutral and $36 target,
BofA Merrill's Neutral and $34 target, and Citigroup's Buy and $37
target.
As you can see, based on the price targets, virtually no firms are really
forecasting sharp gains for the stock over the next 12 months. But, again, this
is more a function of the stock's significant opening pop versus the IPO price,
rather than negative views regarding ELAN's business and fundamentals.
Not surprisingly, shares have opened weakly this morning, currently down about
2.5% to the $32 area. This is a key area for the stock because it opened for
trading at $32.25 on its IPO day, putting all investors that did not get an IPO
allocation potentially underwater. If buyers step in to support the stock here,
despite the negative news regarding the initiations, that would be an encouraging
development for the stock. On the flip side, a clear break below $32 could
instigate a wave of selling as investors look to cut their losses.