ELAN - Zomedica vs. Elanco: Which Pet Stock Is a Better Buy?

Several industries have benefited from the COVID-19 pandemic as people were confined to their homes and entertainment options were limited. Companies part of the e-commerce, streaming, gaming, and streaming vertical saw a massive uptick in consumer demand. 

Another space that significantly benefited from the coronavirus lockdown was the pet industry. More than 11 million U.S. households were estimated to have gotten a new pet during the pandemic. This trend acted as a secular driver for pet healthcare companies.  

Here, we take a look at two companies part of the pet healthcare industry, Zomedica (ZOM) and Elanco (ELAN), to analyze which is a better stock right now.

Zomedica

Zomedica is a development stage veterinary health company that focuses on the needs of clinical veterinarians. It develops products for companion animals. Zomedica is engaged in the development and commercialization of Truforma which is a biosensor platform that detects thyroid disorders in dogs and cats as well as adrenal disorders in dogs.

Zomedica went public in late 2017 and has since returned less than 15% in cumulative returns. The stock is currently trading 68% below its all-time high at $0.97.

In the first quarter of 2021, Zomedica reported sales of just over $14,000. Currently the company is counting on its Truforma platform, a device that helps diagnose and assess certain conditions, to gain popularity. This new product and the company is still in the process of building out its sales and marketing teams. In Q1 its selling, general and administrative expenses totaled $3.5 million and it reported a net loss of $4 million.

The increase in pet ownership will be a key revenue driver for Zomedica. Investors will also get an idea of product demand in the next few months. Analysts expect the company to post sales of $4.43 million in 2021 and by 243% to $15.2 million in 2022. This means the stock is trading at a forward price to 2022 sales multiple of over 60x which is extremely steep given its market cap of $923 million.

Elanco Animal Health

Compared to Zomedica, Elanco is a much bigger company and is valued at a market cap of $15.9 billion. This animal health company develops and markets products for pets and farm animals. It offers pet health disease prevention products such as parasiticides and vaccine products that protect pets from worms, fleas, and ticks under multiple brands including Seresto, Advantage, Advantix, and Advocate.

In 2021, the company is forecast to generate between $4.7 billion in sales while earnings per share are estimated at $1. In 2020, its revenue and EPS stood at $3.27 billion and $0.47 respectively.

The top-line growth can be attributed to strong demand from farmers as well as pet health practitioners in the U.S. Further, Elanco is also experiencing demand from China that is focused on rejuvenating its herd count after a recent swine flu outbreak. In 2020, the company derived over 55% of its sales from international markets.

While Elanco stock is trading at reasonable valuations, investors might be concerned about its high debt levels. It ended the most recent quarter with $6.18 billion in total debt and just $515 million in cash balance. Its management aims to reduce debt by $500 million in 2021 and achieve a leverage ratio of 3x by end of 2023.

The verdict

Looking at the two pet healthcare stocks, it’s evident that Zomedica is a high-risk high-return bet. The company needs its Truforma platform to be a success.  Alternatively, Elanco is an established player in this vertical and continues to grow revenue and earnings at a rapid clip.

Analysts tracking Zomedica expect its stock price to increase by 25% in the next year. On the other hand, Elanco stock is trading at a discount of 4% to average analyst estimates.

Personally, I am a more conservative investor and therefore would pick Elanco as a better stock right now. However, if you are an investor that enjoys high risk opportunities, keep Zomedica on your radar.

ZOM shares rose $0.02 (+1.69%) in after-hours trading Tuesday. Year-to-date, ZOM has gained 320.64%, versus a 13.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

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