Zoetis Inc. (ZTS) discovers, develops, manufactures and markets veterinary vaccines and medicines, complemented by diagnostic products and genetic tests and supported by a range of services. The company provides its services through five categories, namely anti-invectives, vaccines, parasitic ides, medicated feed additives, and other pharmaceuticals.
Elanco Animal Health Incorporated (ELAN) is an animal health care company that develops, manufactures, and markets products for companion and food animals. The company sells its products to third-party distributors, veterinarians, and farm animal producers, and dairy farmers, and provides aquaculture operations.
Remote lifestyles gave rise to increased pet adoption during the worst of the COVID-19 pandemic. Consequently, huge spending on pet toys, nutrition, etc. led to all-time high pet industry sales of $103.60 billion in 2020, up 6.7% year-over-year, according to a report published by American Pet Products Association.
In addition, frequent health check-ups for pets at veterinary clinics have driven increasing sales of pet medications, vaccines and diagnostic devices. Indeed, the global pet care market is expected to grow at a 5.6% CAGR over the next seven years to hit $325.74 billion by 2028.
While ZTS gained 2.9% over the past month, ELAN surged 14.8%. In terms of their performance over the past three months, ZTS is a clear winner with 12.5% gains versus ELAN’s 9.2% returns. But, which of these stocks is a better pick now? Let’s find out.
Latest Movements
On March 10, ZTS announced its long-term “Driven to Care” sustainability goals that mainly include providing care for 225,000 animals in-need annually through charitable programs, adoption of key sustainable animal health solutions, investing in R&D projects for combating diseases that pose the greatest risk to animals and humans, and achieving net zero carbon emissions by 2050.
On February 22, 2021, the European Commission (EC) granted marketing authorization for Solensia, a new feline osteoarthritis treatment to alleviate pain. Existing in 40% of cats, osteoarthritis causes pain and limits a cat’s comfort and quality of life if not treated. With the EC’s approval, ZTS should generate improved sales in the near-term.
ELAN launched ZoaShield in the United States on May 11, 2021. The product offers a proven and flexible zoalene solution that keeps coccidiosis, a parasitic disease found mostly in young animals, under control in an easy, manageable way. The company expects to generate good sales with poultry producers with the product.
On May 4, ELAN introduced Credelio Cat, the first oral flea and tick product for cats. Approved by U.S. Food and Drug Administration (FDA), with a vanilla and yeast scent and flavor, this small, chewable product is safe and effective. ELAN hopes to see rising demand for this product from cat owners.
Recent Financial Results
ZTS’ revenue for its fiscal year 2021 first quarter, ended March 31, 2021, increased 22% year-over-year to $1.87 billion. The company’s non-GAAP gross profit increased 23.1% year-over-year to $1.33 billion. Its non-GAAP operating income came in at $744 million, up more than 36% from the prior-year period. While its non-GAAP net income increased 32.5% year-over-year to $603 million, its non-GAAP EPS increased 32.6% year-over-year to $1.26.
For its fiscal year 2021 first quarter, ended March 31, 2021, ELAN’s revenue increased 88.7% year-over-year to $1.24 billion. The company’s non-GAAP operating income came in at $231 million, up 260.9% from the prior-year period. Its non-GAAP net income increased more than 237% year-over-year to $82 million, while its non-GAAP EPS increased 184.6% year-over-year to $0.37.
Past and Expected Financial Performance
ZTS’s revenue and EBITDA grew at CAGRs of 8.8% and 12.1%, respectively, over the past three years. The company’s EBIT has increased at an 11.3% CAGR over the past three years.
Analysts expect ZTS’ revenue to increase 33.2% year-over-year for its fiscal year 2021 second quarter (ending June 30, 2021), 13.7% in the current year, ending December 31, and 8.1% in its next fiscal year, ending December 2022. Its EPS is expected to increase 21.3% year-over-year for the second quarter, 17.4% for the current year and 12.2% next year. ZTS’ EPS is expected to grow at a 12.5% rate per annum over the next five years.
In comparison, ELAN's revenue and EBITDA grew at CAGRs of 9.9% and 9.5%, respectively, over the past three years. The company’s EBIT has declined at a 27.3% CAGR over the past three years.
Analysts expect ELAN's revenue to increase 108.6% in its fiscal 2021 second quarter (ending June 30, 2021), 43.5% in the current year ending December 2021, and 3.8% in its next fiscal year, ending December 2022. Its EPS is expected to increase 188.9% year-over-year for the second quarter, 119.1% for the current year, and 29.1% next year. However, the stock’s EPS is expected to grow at a 7.5% rate per annum over the next five years.
Profitability
ZTS’ trailing-12-month revenue is 1.82 times ELAN’s. ZTS is also more profitable with a 41.5% EBITDA margin compared to ELAN’s 17.6%.
Also, ZTS' net income margin and ROE of 25.3% and 51.8% respectively, compares well with ELAN’s negative values.
Valuation
In terms of non-GAAP trailing-12-month P/E, ELAN is currently trading at 50.3x, 19.9% higher than ZTS, which is currently trading at 41.99x. Also, in terms of trailing-12-month EV/EBITDA, ELAN’s 33.17x is 11% higher than ZTS’ 29.89x.
Thus, ZTS looks more affordable here.
POWR Ratings
While ELAN has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system, ZTS has an overall A rating, which equates to Strong Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
ZTS has a B grade for Quality. This is justified because the company’s 69.6% trailing-12-month gross profit margin is 26.9% higher than the 54.9% industry average. However, ELAN’s D grade for Quality is consistent with its 53% EBIT margin, which is 3.4% lower than the 54.9% industry average.
Of 229 stocks in the Medical - Pharmaceuticals industry, ELAN is ranked #70, while ZTS is ranked #2.
Beyond what we’ve stated above, our POWR Ratings system has also rated both ZTS and ELAN for Growth, Value, Stability, Momentum and Sentiment.
Get all ELAN ratings here. Also, click here to see the additional POWR Ratings for ZTS.
The Winner
Both ZTS and ELAN can be considered good long-term investments due to their global brand recognition, impressive R&D projects and viable product launches over the past year. However, we believe ZTS is a better buy based on its higher profitability and relatively lower valuation.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Pharmaceuticals industry.
Click here to checkout our Healthcare Sector Report for 2021
ZTS shares were trading at $177.01 per share on Friday afternoon, up $2.34 (+1.34%). Year-to-date, ZTS has gained 7.28%, versus a 12.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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