IDEXX Laboratories, Inc. (IDXX) develops, manufactures and distributes products and provides services for the companion animal veterinary, livestock and poultry, dairy and water testing markets worldwide. The company also sells portable electrolytes and blood gas analyzers for the human point-of-care medical diagnostics market.
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, farm animal producers, and dairy farmers, and provides aquaculture operations.
The heightened adoption of companion animals during the pandemic and huge spending on pet food, toys, grooming and veterinary care have allowed the U.S. pet industry to witness sales worth $103.60 billion in 2020, which represents a 6.7% year-over-year improvement. The American Pet Products Association estimates the pet industry will generate $109.60 billion in sales this year. Also, rising investor optimism surrounding the industry is evident in the ProShares Pet Care ETF’s (PAWZ) 62.4% gains over the past year compared to the SPDR S&P 500 Trust ETF’s (SPY) 33.1% gains.
To capitalize on the industry tailwinds, many pet companies have begun upgrading their existing products. They are also researching to develop new and viable product portfolios, especially drugs, vaccines and diagnostic devices, for pets . 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 ELAN’s stock price has lost 1.7% over the past month, IDXX gained 14.5%. In terms of past nine months’ performance, IDXX is a clear winner with 69.4% gains versus ELAN’s 30.7% returns. But, which of these stocks is a better pick now? Let’s find out.
Latest Movements
IDXX acquired ezyVet, a cloud-based practice information management system (PIMS) on June 2. With the acquisition, IDXX should be able to further expand its world-class cloud software offerings to support customers with technology solutions that raise the standard of care for patients, improve practice efficiency, and enable more effective communication with pet owners.
On January 28, IDXX announced that it would contribute $3.6 million to Tuskegee University College of Veterinary Medicine (TUCVM) over six years to advance diversity, equity, and inclusion in veterinary medicine. In response to tremendous growth in diversity in the pet-owning population over the past 10 years, the initiative should contribute to ensuring the highest standard of care for all pets in all communities.
This month, ELAN agreed to acquire Kindred Biosciences, Inc. (KIN), a biopharmaceutical company that is focused on developing novel pet therapeutics. The transaction, which is valued at $440 million, was expected to close by the third quarter of 2021, with stockholders receiving $9.25 per share. However, several law firms have now been investigating possible breaches of fiduciary duties and other violations of law in connection with the sale of KIN to ELAN for $9.25 per share. The complaint alleges that KIN oversaw an unfair process and ultimately signed onto an inadequate merger agreement.
And on June 9, ELAN announced the sale of its three manufacturing sites at Shawnee and Speke to TriRx Pharmaceuticals, a global contract development and manufacturing organization that serves the biopharmaceutical market. The companies have also entered a long-term supply agreement for the facilities to continue to manufacture existing ELAN products. Consequently, ELAN anticipates an impairment charge of $245 million - $305 million to be taken in the second quarter of 2021, and the sale of the Shawnee facility is expected to reduce its full-year 2021 revenue by $10-$20 million.
Recent Financial Results
IDXX’s total revenues for its fiscal first quarter, ended March 31, 2021, increased 24.2% year-over-year to $777.71 million. The company’s non-GAAP operating profit is reported at $237.80 million for the quarter, which represents a 64.8% improvement year-over-year. While its net income increased 82.7% year-over-year to $204.26 million, its non-GAAP EPS increased 72.7% year-over-year to $2.09. The company had $351.16 million in cash and cash equivalents as of March 31, 2021.
For its fiscal 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 237% year-over-year to $82 million, while its non-GAAP EPS increased 184.6% year-over-year to $0.37. As of March 31, 2021, the company had $515 million in cash and cash equivalents.
Past and Expected Financial Performance
IDXX’s revenue and EBITDA grew at CAGRs of 11.8% and 20.1%, respectively, over the past three years. The company’s EBIT has increased at a 22.5% CAGR over the past three years.
Analysts expect IDXX’s revenue to increase 24.6% year-over-year in the current quarter (ending June 30, 2021), 16.2% in the current year and 9.9% next year. Its EPS is expected to increase 18.9% year-over-year in the current quarter, 21.2% for the current year, and 11.9% next year. The stock’s EPS is expected to grow at a 16.7% 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 111.9% year-over-year in the current quarter (ending June 30, 2021), 44% in the current year, and 3.6% next year. Its EPS is expected to increase 194.5% in the current quarter, 119.7% in the current year and 27.4% next year. Analysts expect the stock’s EPS to grow at an 11% rate per annum over the next five years.
Profitability
ELAN's trailing-12-month revenue is 1.3 times IDXX’s. However, IDXX is more profitable, with a 27.9% EBIT Margin versus ELAN’s 2%.
Also, IDXX’s ROA and ROTC values of 23.7% and 32.4%, respectively, compare favorably with ELAN’s marginal returns.
Valuation
In terms of non-GAAP forward PEG, IDXX is currently trading at 3.17x, which is 223.5% higher than ELAN, which is currently trading at 0.98x.
Also, ELAN’s 20.42x forward EV/EBITDA is significantly lower than IDXX’s 51.58x.
POWR Ratings
While ELAN has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, IDXX has an overall B grade of, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
In terms of Sentiment, ELAN has been graded an A because analysts expect the company’s revenues to increase 44% year-over-year in the current year. In comparison, IDXX’s B grade for Sentiment reflects its relatively low revenue estimates. Analysts expect IDXX’s revenue to increase 16.2% in the current year.
However, IDXX has an A grade for Quality, which is consistent with its higher-than-industry profitability ratios. The company’s 27.9% EBIT Margin is 1484.4% higher than the 1.8% industry average. However, ELAN’s D grade for Quality is in sync with the company’s negative net income margin and return on equity.
Of 183 stocks in the Medical – Devices & Equipment industry, IDXX is ranked #23. ELAN is ranked #59 of 227 stocks in the Medical - Pharmaceuticals industry.
Beyond what we’ve stated above, our POWR Ratings system has also rated both IDXX and ELAN for Growth, Momentum, Stability, and Value.
Get all ELAN ratings here. Also, click here to see the additional POWR Ratings for IDXX.
The Winner
According to the 2019-2020 APPA National Pet Owners Survey, 67% of U.S. households own a pet. Over the years, young people’s spending on pet food and medical consumables have been increasing. This bodes well for the pet industry. Ongoing research and development of products to keep pets healthy should allow both IDXX and ELAN to grow. However, based on the latest developments and higher profitability, IDXX appears to be a better buy here.
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 – Devices & Equipment industry, and here for those in the Medical - Pharmaceuticals industry.
Click here to checkout our Healthcare Sector Report for 2021
IDXX shares were trading at $606.36 per share on Monday morning, up $5.31 (+0.88%). Year-to-date, IDXX has gained 21.30%, versus a 12.70% 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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