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
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, 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.
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