Morgan Stanley downgrades Elanco Animal Health as questions about future earnings linger

Published Thu, Aug 18 20226:00 AM EDT

Morgan Stanley is moving to the sidelines on Elanco Animal Health as questions about the company's future profits linger. The firm on Thursday downgraded shares of the company to equal weight from overweight and slashed its price target to $22 from $37. The new target implies upside of roughly 15% Wednesday's close at $19.08 per share. Elanco recently lowered its 2022 outlook and postponed its medium-term guidance. While that was anticipated, investors are still waiting for answers to lingering questions about the company's profitability, timing and differentiation of innovation drivers and magnitude of certain headwinds going into next year, Erin Wright wrote in a note. "Overall, our previous Overweight thesis was predicated on a turnaround story materializing with a meaningful profit ramp ahead, where we were optimistic it would not disappoint," said Wright. "We are now moving to the sidelines with building company-specific headwinds." Elanco shares have struggled this year, falling more than 33% in that time. The stock is also down 40% over the past year. Future profits in question Morgan Stanley now expects lower 2022 earnings per share of $1.07 instead of $1.17 from Elanco, reflecting multiple headwinds such as foreign exchange pressures, lockdowns in China, supply chain issues and overall macroeconomic weakness. It's also focused on more company-specific headwinds such as a slower innovation ramp, greater parasiticide competition and lower price realization. These incremental headwinds are "disappointing and clearly prevented ELAN's prospects for hitting its previous medium-term margin goals," said Wright. However, the stock is appropriately reflecting these obstacles and trading at 13x 2023 full year EV/EBITDA. That's below industry peers Zoetis at 21.9x and Animal Health manufacturers at 16.7x, but well above livestock pure-play competitor Phibro Animal Health — which trades at 8.6x and serves as a floor to valuation, according to Morgan Stanley. —CNBC's Michael Bloom contributed reporting.