One of Wall Street's biggest winners of the day is Elanco Animal Health, a pharmaceutical company whose shares have climbed 5.0% to a price of $15.23 -- 20.8% below its average analyst target price of $19.23.
The average analyst rating for the stock is buy. ELAN may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 1.8% over the last year, returning 22.8%.
Elanco Animal Health Incorporated, an animal health company, innovates, develops, manufactures, and markets products for pets and farm animals. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Elanco Animal Health does not release its trailing 12 month P/E ratio since its earnings per share of $-2.55 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for ELAN of -6.0. Based on the company's positive earnings guidance of $1.02, the stock has a forward P/E ratio of 14.9.
As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 27.61, and the S&P 500 has an average of 28.21. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Elanco Animal Health's PEG ratio of 1.91 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Elanco Animal Health's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 271,000 | 116,000 | 155,000 | -44.84 |
| 2022 | 452,000 | 171,000 | 281,000 | -13.27 |
| 2021 | 483,000 | 159,000 | 324,000 | 302.5 |
| 2020 | -41,000 | 119,000 | -160,000 | -290.48 |
| 2019 | 224,000 | 140,000 | 84,000 | -76.19 |
| 2018 | 487,300 | 134,500 | 352,800 |
- Average free cash flow: $172.8 Million
- Average free cash flown growth rate: -6.6 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, ELAN is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Elanco Animal Health has a P/B ratio of 1.27. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Health Care sector, which stood at 3.69 as of the second quarter of 2024.
With a negative P/E ratio., a lower P/B ratio than its sector average, and positive cash flows with a downwards trend, we can conclude that Elanco Animal Health is probably overvalued at current prices. The stock presents poor growth indicators because of its with a negative growth trend, and no PEG ratio.
