Does Eli Lilly Deserve Its Price Premium?

Among financial pros’ top five drug manufacturer stock searches, Eli Lilly (LLY) performed best over the last year, up 23% in price.

Over five years, LLY is up 394%. Only AbbVie (ABBV) comes close at 117%.

Although Eli Lilly expects revenues to climb 8.7% next year, beating all its peers, the stock is expensive, trading at double the price-to-earnings and price-to-cash ratios of its nearest competitor.

So does it make sense to put LLY in your portfolio?

Eli Lilly’s Business

Eli Lilly rose to fame in the 1990s with its blockbuster antidepressant Prozac.

Since then, the company has become one of the largest pharmaceutical players in the world.

Its drugs cover a wide range of categories, from neuroscience to oncology.

The company boasts one of the largest drug pipelines in the marketplace.

Source: Eli Lilly

And investors are really excited about the key growth products the company has launched in the last few years.

Source: Eli Lilly

These products are so important to Eli Lilly’s business that despite a huge negative impact on volume from COVID-19 antibodies, these products grew 15.3%, netting the company a drop of just 2% in overall volume growth.

Financials

Source: Stock Analysis

It’s interesting to see LLY’s premium valuation given the stock’s decent but not blockbuster revenue growth.

That may be due to LLY’s massive improvement in profit margin since 2018.

Yet its free-cash-flow margin is only slightly higher.

Nonetheless, with $22 billion in cash and no real long-term debt, Eli Lilly can acquire its way to the future.

Valuation

Source: Seeking Alpha

Investors are apparently willing to pay nearly twice as much for LLY as for its competitors.

To give you an idea of how rich the valuation is, famously sky-high-value Tesla (TSLA) trades at 53.1x trailing earnings and 41.5x trailing cash.

Growth

Source: Seeking Alpha

Speaking of which, it’s safe to say Eli Lilly’s growth doesn’t come close to Tesla’s.

In fact, it’s barely better than its peers in many respects.

Profitability

Source: Seeking Alpha

And here’s another kick in the pants: Tesla runs a 15.4% net income margin, not too far behind Eli Lilly’s.

In fact, compared to its peers, Eli Lilly’s profitability isn’t that impressive.

Our Opinion 3/10

Eli Lilly may be a great company with a fantastic pipeline. 

But there’s no reason to overpay for LLY stock.

There are plenty of comparable drug companies with better growth and valuations.

• Costco’s Valuation Problem
• Crypto ATMs Are Popping Up Worldwide
• Wood You Buy This Stock?
• The BEST Auto Parts Store Company