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Eli Lilly: 50% Upside For LLY Stock?

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On Thursday, August 7, Eli Lilly’s stock (NYSE:LLY) dropped by 14%, even though the company announced a strong quarter with earnings, revenues, and guidance that exceeded market expectations. This positive performance was mainly fueled by the ongoing success of its medications, Mounjaro and Zepbound.

The primary factor behind the drastic decline was an update concerning the late-stage clinical trial for Orforglipron, Eli Lilly’s daily oral weight-loss pill. The trial revealed that patients lost almost 12% of their body weight, which fell short of the 15% analysts had predicted. This information triggered a chain reaction, raising the stock price of its competitor, Novo Nordisk, which is also working on an oral weight-loss pill. The market anticipates that the company with the more effective drug will likely take control of the oral weight-loss sector.

In the wake of this sell-off, a critical question arises about whether LLY stock represents a buying opportunity. Analysis indicates that it does. Despite the recent drop, there seems to be little reason for concern regarding the company’s long-term outlook.

This conclusion stems from a comparison of Eli Lilly’s current stock valuation against its operational performance and financial stability over recent years. A thorough analysis of key metrics—including growth, profitability, financial stability, and resilience during downturns—suggests that the company exhibits strong operating performance and financial health.

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How Does Eli Lilly’s Valuation Look vs. The S&P 500?

When assessing what you pay per dollar of sales or profit, LLY stock appears quite expensive in comparison to the broader market.

  • Eli Lilly has a price-to-sales (P/S) ratio of 13 compared to a figure of 3.0 for the S&P 500
  • Additionally, it has a price-to-earnings (P/E) ratio of 42 versus the benchmark’s 22.6

How Have Eli Lilly’s Revenues Grown Over Recent Years?

Eli Lilly’s Revenues have increased significantly over the last few years.

  • Eli Lilly has experienced its top line grow at an average rate of 20.2% over the last 3 years (vs. an increase of 5.2% for S&P 500)
  • Moreover, its quarterly revenues grew 38% to $15.6 Billion in the most recent quarter from $11.3 Billion a year ago (versus a 4.3% improvement for S&P 500)

How Profitable Is Eli Lilly?

Eli Lilly’s profit margins are significantly higher than those of most companies in the Trefis coverage universe.

  • Eli Lilly’s Operating Income over the last four quarters was $23 Billion, indicating a substantially high Operating Margin of 46.5% (compared to 18.4% for S&P 500)
  • Eli Lilly’s Operating Cash Flow (OCF) during this period was $10.9 Billion, reflecting a high OCF Margin of 22.3% (compared to 19.8% for S&P 500)
  • Over the past four-quarter span, Eli Lilly’s Net Income amounted to $14 Billion—signifying a strong Net Income Margin of 28.2% (compared to 12.3% for S&P 500)

Does Eli Lilly Look Financially Stable?

Eli Lilly’s balance sheet appears robust.

  • Eli Lilly’s Debt figure was $40 Billion at the end of the most recent quarter, while its market capitalization is $585 Billion. This results in a very low Debt-to-Equity Ratio of 6.8% (vs. 23.9% for S&P 500). [Note: A low Debt-to-Equity Ratio is preferable]
  • Cash (including cash equivalents) accounts for $3.5 Billion out of the $101 Billion in Total Assets for Eli Lilly. This results in a suboptimal Cash-to-Assets Ratio of 3.5% (versus 6.7% for S&P 500)

How Resilient Is LLY Stock During A Downturn?

LLY stock has shown more resilience than the benchmark S&P 500 index during several recent downturns. As investors hope for a soft landing of the U.S. economy, what might happen if another recession strikes? Our dashboard How Low Can Stocks Go During A Market Crash illustrates how key stocks have fared during and after the last six market crashes.

Inflation Shock (2022)

  • LLY stock declined 18.7% from a peak of $272.71 on 17 August 2021 to $221.60 on 28 September 2021, compared to a peak-to-trough fall of 25.4% for the S&P 500
  • The stock fully rebounded to its pre-Crisis peak by 15 December 2021
  • Since that time, the stock has risen to a peak of $960.02 on 2 September 2024 and currently trades around $640

COVID-19 Pandemic (2020)

  • LLY stock fell 22.9% from a high of $169.13 on 8 July 2020 to $130.46 on 30 October 2020, compared to a peak-to-trough decline of 33.9% for the S&P 500
  • The stock fully recovered to its pre-Crisis peak by 16 December 2020

Global Financial Crisis (2008)

  • LLY stock dropped 54.6% from a high of $60.56 on 20 April 2007 to $27.47 on 5 March 2009, while the peak-to-trough decline for the S&P 500 was 56.8%
  • The stock fully regained its pre-Crisis peak by 21 April 2014

Putting All The Pieces Together: What It Means For LLY Stock

In conclusion, Eli Lilly’s performance across the aforementioned parameters is summarized as follows:

• Growth: Very Strong
• Profitability: Strong
• Financial Stability: Strong
• Downturn Resilience: Strong
• Overall: Strong

Overall, Eli Lilly has demonstrated strong performance across essential financial metrics. While its current valuation exceeds that of the broader market, this is a typical trend for companies with high growth. During the last three years, Eli Lilly’s average annual sales growth has surpassed 20%, with an impressive 38% growth noted in the latest quarter. The company’s average price-to-sales ratio during this period has been 14x.

We believe that the recent decline in Eli Lilly’s stock offers an attractive opportunity for long-term investors. Nonetheless, it is essential to recognize the potential risks involved. Our optimistic outlook might be affected by worries regarding future growth or broader market trends within the pharmaceutical industry, including the possibility of tariffs on pharmaceuticals imported into the U.S.

The company also encounters considerable competition from peers such as Novo Nordisk, a significant player in the weight-loss sector. Novo Nordisk is developing its own daily oral weight-loss pill, which may ultimately be more effective than Eli Lilly’s. Investors should brace for the potential of the stock dropping an additional 30-40% from its current valuation. Refer to – Buy or Sell LLY Stock – for more information.

Despite these risks, even if the market is presently undervaluing Eli Lilly’s stock due to Novo Nordisk’s possible lead in the race for an oral weight-loss pill, the company’s strong fundamentals and operational performance indicate ongoing substantial revenue growth. This is chiefly due to its GLP-1 portfolio and pipeline. Related – Eli Lilly Diversifies With Verve Gene Therapy Deal.

Given the tremendous potential of the obesity treatment market and Eli Lilly’s recent advances in both sales and profitability, its valuation multiples may increase beyond historical averages. We anticipate significant gains for investors with a three- to five-year investment outlook. Moreover, analysts’ average price projection of $945 suggests a nearly 50% upside for Eli Lilly.

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