Is this small-cap growth stock a bargain after today’s results?

When we think of healthcare and pharmaceuticals, companies such as GlaxoSmithKline and AstraZeneca generally spring to mind. But what about animal health? Are there investment opportunities in this area?

Today, I’m running the rule over specialist firm ECO Animal Health (LSE: EAH), which has this morning released its full-year results for the year ended 31 March. The stock has performed well over the last two years, so can this run continue?

Business description  

ECO manufactures and supplies animal health products, specialising in the development and marketing of medicines for the control of disease in livestock and companion animals. The £400m market cap company has operations in the UK, Europe, North America, Latin America, Africa and the Middle East and the majority of its sales are in currencies other than sterling. The company’s flagship product is Aivlosin, an antibiotic that treats a range of diseases in pigs and poultry.
It has enjoyed a strong rise in profitability in recent years. For example, for the five-year period to 2016, revenue increased from £27.1m to £47.1m, a compound annual growth rate (CAGR) of a healthy 11.7%. The company’s operating margin ticked up steadily in this time, resulting in net profit rising from £1.59m to £6.04m, a CAGR of over 30%.
Unsurprisingly, with profitability rising significantly, the company’s share price has followed a similar trajectory, and over the last five years the stock has risen from around 230p to 600p, a gain of an impressive 161%.
So are there further gains to come? Let’s look at the full-year results for an insight.

FY2017 results

This morning’s figures certainly look impressive. Revenue for the year increased 30% to £61.4m, and adjusted EBITDA rose 54% to £17.1m. Earnings per share jumped to 16.4p from 9.7p last year and the company increased its dividend payout by 25% to 7.1p per share. Cash generated from operations rose to £13.1m and left the company with a cash balance of £21m at the end of the year.
Management sounded confident about the future, with Chairman Peter Lawrence commenting: “ECO has started the current year strongly with revenue ahead of the previous year. The business is robust with a sound, debt-free balance sheet and this, coupled with our strong cash generation, will allow us to capitalise on market opportunities as they arise. We look forward with confidence.” 


So it appears to be enjoying strong momentum at present, but is the valuation attractive right now? 

Today’s earnings per share figure places the company on a trailing P/E ratio of a high 37.8. With analysts forecasting earnings of 17.3p per share for FY2018, the forward-looking P/E ratio is a lofty 35.8. At that valuation, I’m not seeing a huge amount of value if I’m honest. The company’s growth certainly looks appealing, however the P/E ratio is just a little too high to interest me right now and doesn’t leave much room for error. For this reason, I’ll keep ECO Animal Health on my watchlist for now and monitor the stock for a pull-back in the share price.

Is this small-cap stock a better investment opportunity?

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Edward Sheldon owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.