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Why I’d buy this small-cap over Genus plc despite today’s positive results

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Leading animal genetics company Genus (LSE: GNS) has released a positive trading update today. In spite of mixed market conditions, Genus made progress towards its strategic objectives and is performing in line with expectations for the full year. Despite this, healthcare peer Eco Animal Health (LSE: EAH) has brighter long-term prospects.

Genus’s customers endured a rather mixed period from July to November. Strong pig production volumes in some markets such as the US caused substantially lower pig prices in those regions. However, in other regions such as Europe and China, pig prices either improved or remained strong. This supported robust demand for Genus’s PIC genetics as well as volume growth.

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Meanwhile, dairy prices began to improve on a global basis. However, they remain at levels where a significant proportion of dairy farmers are unprofitable. Beef prices in the US declined throughout the period, which meant that Genus’s customers adopted a more cautious approach to demand. These challenging conditions led to lower semen volumes for Genus ABS, while IVB continued to grow embryo volumes.

Looking ahead, Genus is forecast to increase its earnings by 6% in the current year. While this rate of growth is roughly in line with that of the wider market, Genus trades on a high-growth valuation that its forecasts don’t reflect. For example, Genus has a price-to-earnings (P/E) ratio of 29.8 and when this is combined with its rating, it equates to a price-to-earnings growth (PEG) ratio of 5. This indicates that Genus is overvalued at the present time.

Small is beautiful?

That’s a key reason why fellow healthcare company Eco Animal Health has huge appeal in comparison. Unlike Genus, Eco Animal Health is expected to record strong growth in both the current and next year. Its earnings are expected to rise by 34% this year and by a further 17% next year. When combined with its P/E ratio of 51.2, this equates to a much more appealing PEG ratio of 2.

Certainly, Eco Animal Health is a smaller business and lacks the size, scale and financial firepower of Genus. However, it has an excellent record of delivering above average growth over a long period. For example, in the last five years Eco Animal Health’s earnings have risen by 130% and it’s not unreasonable to expect them to record a similarly strong growth rate over the next five years.

While Genus is a high quality company that has excellent long-term growth prospects, its valuation is too high to merit purchase at the present time. That’s especially the case since an upgrade to its guidance may not be on the cards as the pig and dairy markets offer rather mixed outlooks. Therefore, for long-term investors buying Eco Animal Health is the logical solution, while also waiting for an improved share price for Genus before buying a slice of it.

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Peter Stephens owns shares of ECO Animal Health Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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