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Proprietary Data Insights Financial Pros’ Top Pharma Stock Searches in the Last Month
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110x Earnings: Is Eli Lilly’s (LLY) Stock Too Fat to Swallow?
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We’ve all seen ads for weight loss pills, none of them reliable…until now. What started with a standard diabetes drug has now become a race to churn out fat-fighting medications, which is a massive market. Over 40% of adults in the U.S. are considered obese. On average obese adults healthcare costs $1,861 more annually, or $173 billion. Obesity is a major contributing factor to half of the top 8 leading causes of death in the U.S. And it’s a big reason why Eli Lilly’s (LLY) stock is up a whopping 53% year-to-date and nearly 200% in the past two years. Unlike many of its peers, Eli Lilly doesn’t face a patent cliff or a Covid product hangover. The company is in pure growth mode, which is why many financial pros have consistently researched it over the past year. However, at 110x trailing 12-month earnings and 178x trailing 12-month cash, the stock isn’t cheap by any stretch. So, is this one we have to watch and wish or is there more room to run? Eli Lilly’s Business Eli Lilly has emerged as a frontrunner in the battle against obesity and diabetes. Its groundbreaking treatments, Mounjaro and Zepbound, have catapulted Lilly to the forefront of the weight loss revolution, driving exceptional growth and market dominance. Lilly breaks down its business into the following segments:
The company’s Q2 2024 earnings report revealed a staggering 36% increase in revenue, propelled by the meteoric rise of Mounjaro and Zepbound. Management then raised its full-year revenue guidance by $3 billion.
Source: Eli Lilly Q2 2024 Investor Presentation Lilly continues to push forward with heavy R&D, eating up almost half of the company’s total planned capital spending in the first half. Beyond obesity, the company is optimistic about its new Alzheimer’s drug, Kisunla, one of the few medications available to treat the disease. Eli Lilly has delivered excellent growth in the past several years, but that may be a fraction of what’s expected in the near future. Analysts predict the company’s revenues could double by 2026-2027, with annual sales potentially hitting $20 billion by the decade’s end. The company will certainly face challenges from other manufacturers. How much remains to be seen. Financials
Source: Stock Analysis Before the Ozempic craze, Eli Lilly has seen sales growth in the single digits. Its margins held or expanded slightly, helping the company maintain its excellent free cash flow. Now, it’s focused on the future, plowing money back into its growth drugs. While that’s clipped cash for share buybacks, it’s helped the company expand margins and fuel the best revenue growth in over a decade. The company has spend roughly $2 billion in acquisitions over the past year in efforts to reinforce its already robust pipeline. Total debt sits at $29 billion, which is historically high for the company, costing them $626 million annually. However, if the growth happens as expected, Lilly will have more than enough money to lower that number. Valuation
Source: Seeking Alpha No other major drug company commands the premium Eli Lilly does. Then again, none of them have a growth portoflio like Eli Lilly. Pfizer (PFE), for example, has to contend with dwindling Covid treatment sales. Bristol Myers Squibb (BMY) faces a major patent cliff over the next few years, as does Gilead Sciences (GILD). Abbvie (ABBV) is already dealing with the fallout of its blockbuster, Humira, which came off patent. But is the valuation for Lilly too rich? Given the historically high free cash flow margins, maybe not. Growth
Source: Seeking Alpha Lilly’s revenue growth is exceptional – its profitability improvements are astounding. None of its peers come close to these kinds of numbers. This is the key to Lilly’s dominance. Profitability
Source: Seeking Alpha Bristol Myers or Abbvie might come out on top of Lilly in EBITDA. But it’s pretty clear Eli Lilly has the best margins of the group. But let us give you something to think about… Our Opinion 6/10 Lilly’s current free cash flow margin is basically zero. Historically, it’s been around 20%. If you think about it that way and do some quick math based on doubled revenues in 2-3 years, you’re looking at $16 billion in free cash flow annually, or $17.78 per share, putting the current stock price at 50x that forward free cash flow number. And that’s a best-case scenario. For us, that’s just too high of a premium to pay for growth. Eli Lilly may be the best drug manufacturer at the moment. But we can’t justify overpaying for the stock. |
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