On Monday, UBS began coverage of Elanco Animal Health (NYSE:ELAN) stock, assigning a Buy rating to the company's stock along with an $18.00 price target.
According to the investment firm, the current market sentiment has significantly undervalued Elanco's shares, which have experienced a 16% year-to-date decline and a 7% drop just last week, primarily due to concerns surrounding one of its products, Zenrelia.
InvestingPro data shows analysts maintain a moderate buy consensus with price targets ranging from $14 to $20, suggesting significant upside potential from current levels.
The analyst at UBS believes the market is overly pessimistic about Zenrelia's future, assuming a 10-year EBITDA Compound Annual Growth Rate (CAGR) of only 4%, compared to UBS's estimate of 7%.
This conservative outlook contrasts with UBS's more optimistic assessment of Elanco's growth potential. The company's current EBITDA stands at $875 million, with InvestingPro analysis indicating strong financial health with a "GOOD" overall rating.
UBS's analysis suggests that despite the current focus on specific products like Zenrelia and Quattro, the broader opportunities for Elanco lie in its expansion into new, additive verticals. These areas are expected to become long-term gross profit drivers, benefiting from reduced sales, general, and administrative (SG&A) expenses and product line extensions.
Furthermore, UBS highlighted Elanco's impressive debt reduction, noting that the company has decreased its leverage by six turns since late 2020. This rapid deleveraging, combined with the anticipated EBITDA growth, is seen as a positive indicator of the company's financial health.
The firm concludes that the potential for EBITDA recovery, particularly in the high single digits, outweighs the low downside risk. This assessment presents a favorable risk-reward ratio of 3:1, making Elanco's stock an attractive long-term investment opportunity, especially at its current depressed price levels.
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