Elanco currently trades at $23.15 per share and has shown little upside over the past six months, posting a small loss of 1.1%. The stock also fell short of the S&P 500’s 14.2% gain during that period.
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Why Is Elanco Not Exciting?
We’re sitting this one out for now. Here are three reasons we avoid ELAN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Elanco’s sales grew at a tepid 2% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Analyzing the trend in its profitability, Elanco’s adjusted operating margin decreased by 3.5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 17.1%.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Elanco’s five-year average ROIC was negative 1.8%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.
Final Judgment
Elanco isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 19.3× forward P/E (or $23.15 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than Elanco
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