Is it Too Late to Buy Eli Lilly Stock?

Pharmaceutical major Eli Lilly (NYSE:LLY) has seen its stock rise by more than 110% over the past 12 months, allowing it to handily beat the market in what was already an unusually bullish period.

Propelled by a new class of weight-loss drugs and the continued strength of its existing pharmaceutical portfolio, the company saw ongoing growth and became a favorite among retail and institutional investors alike.

But what now? Does the stock still have room left to generate further returns?

Eli Lilly’s Robust 2023 Results

To a large extent, the price surge in LLY shares over the past year has been tied directly to the company’s better-than-expected performance. In Q4, for example, revenue rose by 28% year-over-year to $9.35 billion. For the full year, revenues climbed by 20%.

Beyond impressive revenue growth, it has also been able to achieve strong earnings growth. Net income rose by 13% in Q4, resulting in quarterly earnings of $2.42 per share.

Although earnings for the full year were down 16%, Eli Lilly was able to maintain a very respectable full-year net margin of 15.4%. In addition, management reported a very positive return of 51.2% on equity.

Taking a longer view, Eli Lilly has established a reliable track record of both revenue and earnings growth over several years. Going back five years, the company reported revenues of $21.49 billion and net income of $3.23 billion in 2018. For 2023, those numbers rose to $34.12 billion and $5.24 billion, respectively.

Growth Catalysts

It’s worth noting that Eli Lilly still has a considerable growth opportunity in front of it. In large part, the company’s forward growth is expected to be driven by two new drugs, Zepbound and Mounjaro.

These two drugs, both forms of the same active ingredient, are marketed for anti-obesity and diabetes management, respectively.

Demand for anti-obesity drugs has spiked since the release of Ozempic, resulting in shortages that pharmaceutical companies like Eli Lilly are rushing to fill.

This high level of demand for anti-obesity medications is only expected to grow in the coming years, creating excellent conditions for Eli Lilly’s growth.

By 2030, sales of these drugs in just seven large, developed countries are expected to represent a $30 billion market. Continued expansion internationally is highly likely to provide years of predictable revenue growth for companies that produce leading drugs in this category.

With about 36% of American adults suffering from obesity, the domestic market for Zepbound alone may prove to be exceptionally lucrative for the company.

The drug was approved by the FDA in November of 2023, meaning that it was on the market for less than two months of the last fiscal year.

Despite this short selling window, the drug contributed $175.8 million to last year’s revenues.

Management expects revenues to continue climbing in 2024, reaching a projected range of $40.4 billion to $41.6 billion.

Earnings per share for this year are expected to be $11.80 to $12.30. Over the next few years, analysts expect LLY’s revenues to grow at a compounded rate of about 15.9% while earnings compound at a more rapid 27.2%.

Is Eli Lilly Overvalued?

Despite excellent share price performance over the past year, there is a case to be made that Eli Lilly shares are moderately overvalued. The stock trades at about 63.1x expected forward earnings, 102.8x cash flow and 21.8x cash flow.

Even with a high rate of earnings growth expected to continue for the next several years, these multiples appear to price the stock for a best-case growth scenario.

Analyst price forecasts seem to indicate that the stock may already reached the top of its reasonable valuation range. The median price target for LLY in the coming 12 months is $823, just 5% above the most recent price of $784.21.

Although about three-quarters of analysts still have active buy ratings on LLY, it appears that the stock may be in for a period of more muted returns ahead.

While Eli Lilly may not be massively overvalued, shares appear to trade at or perhaps slightly above a fair price. As such, management may not have much room for error when it comes to delivering earnings growth.

What Do Shareholders Need To Know?

Eli Lilly’s debt-to-equity ratio of 1.7x ranks higher among the list of concerns for prospective investors but it’s not egregious by any means.

Zepbound is also likely to face competitive pressures as more companies attempt to capitalize on the demand for pharmaceutical obesity solutions.

In addition to existing competitors, most notably Ozempic, new drugs may stifle Zepbound’s market traction.

A prominent upcoming example is a new drug being tested by Viking Therapeutics. This drug, still in clinical trials, may be even more effective than Zepbound.

Is it Too Late to Buy Eli Lilly?

After more than doubling in the past 12 months, Eli Lilly stock is unlikely to produce market-beating returns again in the near future so it seems too late to buy it.

Due to its high valuation, LLY may have limited room left to run until management proves that it can keep earnings growing at double-digit rates over the next several years. In this sense, it’s likely too late to buy Eli Lilly as a means of capturing the kind of returns the stock has generated over the last year.

With that said income seekers may well find the stock compelling. In addition to a high likelihood that earnings will continue to grow, Eli Lilly offers a dividend of $5.20 per share. While this translates to a yield of just 0.7%, higher dividends are likely to accompany further growth.

As a play on the burgeoning weight loss drug market, Eli Lilly is impossible to ignore, even if returns are more muted over the coming year. Certainly competition is rising, but its brand advantage and lead in the market are going to be hard to dislodge by rivals.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.