Jefferies downgrades Zoetis, Elanco on pricing risk; prefers IDEXX

Investing.com -- Jefferies downgraded Zoetis and Elanco to Hold from Buy on Tuesday, warning that pricing power in animal health is at risk. The firm reiterated its Buy rating on IDEXX Laboratories.

“Pricing power is at risk in animal health, but diagnostics isn’t like the rest of the industry,” analyst Keith Devas wrote.

Jefferies noted that price and mix now account for all growth in vet and pet services, compared with 50% to 65% before the pandemic.

With muted vet visits, mid-single-digit vet labor inflation and waning owner sentiment, the firm said assuming continued pricing gains for the industry is a risk.

Devas believes Zoetis’ decision to give margin back to clinics and pet owners resets the industry profit pool and limits the path to share and margin gains for competitors.

“This reshaping of industry economics, and the chance that Zoetis management concedes more to quell share losses, skews risk/reward unfavorably for animal health pharma,” he said.

Jefferies estimates price made up about 64% of Zoetis’ EPS growth from 2022 to 2025. Its base case sees 2027 EPS falling 2%, about 8% below the Street. The firm lowered the price target to $83 from $103.

For Elanco, which has grown through volume rather than price, it cut its target to $24 from $31 and expects an 8% EPS CAGR, below the company’s target.

Diagnostics, by contrast, is better insulated. Jefferies said innovation and an aging pandemic pet cohort should keep IDEXX’s organic growth near 9% and drive double-digit EPS growth.

“At 29x FY3 P/E vs. 40x 10Y avg., shares price in pharma pressures that diagnostics does not face,” the analyst said. Jefferies assigned a $705 price target on IDEXX, down from $795.

Original Article

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