Elanco reports solid quarter but global concerns lead to drop in share price

Elanco Animal Health’s revenue and earnings per share beat Wall Street estimates for the first quarter of 2022, but its stock slipped more than 8% on Monday after the Greenfield-based animal health giant reduced its guidance for the year.

The company said the reduction is due to the negative impact of foreign exchange rates, uncertainties over the war in Ukraine, and increased protective measures around COVID-19 in China, which is affecting consumer access to goods and services.

The company posted adjusted net income of $177 million on revenue of $1.2 billion. Adjusted earnings per share was 36 cents, beating Wall Street’s estimates by 1 cent, according to Zacks Investment Research.

The company has topped consensus revenue estimates four times over the last four quarters, Zacks reported.

Despite the solid quarter, Elanco’s warnings about pressures in upcoming months impacted its stock all day Monday. Shares closed at $21.84, down $1.95 or 8.2%.

That was steeper than the overall market: The Standard & Poor’s 500 closed down 3.2% on Monday, while the Dow Jones Industrial index was down nearly 2%.

Several analysts said Elanco faces a bright future, implying that the market might be overreacting to the lowered revenue and profit guidance.

“Several new product approvals and upcoming filings bolster the outlook,” Cowen analyst Steve Scala wrote in a research note Monday. He maintained his “outperform” rating and predicted Elanco’s stock would hit $40 within 12 months. He said he expected sales to accelerate in the second half of the year.

Elanco CEO Jeff Simmons said on a conference call Monday that conditions in certain parts of the world were likely to put a drag on revenue in coming months.

He said increased protective measures around COVID-19 in China are hurting consumer access to goods and services. In the first quarter, Elanco’s pet health business in China grew by double digits, but momentum has slowed across the industry through April and into May.

On the farm animal side, restrictions in major population centers in China are limiting social gatherings and food service consumption, exacerbating the already imbalanced supply and demand for pork, Elanco said.

“China lockdowns are impacting both pork and pets … but we see it lessening in the second half” of 2022, Simmons said the call.

In 2021, Russia and Ukraine collectively represented less than 2% of Elanco’s global business. The company said it continues to operate in the region, “providing essential health care products for animals” despite an increasingly challenging environment.

For the full year, Elanco said it expects to post revenue in a range of $4.7 billion and $4.755 billion.

That’s down from Elanco’s guidance in February of full-year revenue in the range of $4.745 billion and $4.8 billion.

Likewise, the company said it now expects to report adjusted diluted earnings per share in the range of $1.15 to $1.21, down from guidance in February of between $1.18 to $1.24.

JP Morgan analyst Chris Schott kept his “overweight” rating for Elanco stock and told clients the company’s first quarter was better than expected in pet care sales, offsetting food animal results that were below expectations.

Simmons told analysts the company is “off to a great start of the year.” He said the company has received approvals on five “portfolio enhancing” products and remain on track for at least seven approvals this year.

“Our innovation, very importantly, is progressing,” he said, “and we remain diligently focused on executing our plans in these increasingly volatile times.”