Is it Too Late to Buy LLY Stock?

Eli Lilly (NYSE:LLY) has been on an impressive run lately. The pharmaceutical stock has gained 77% in the last year and achieved record highs of over $635 per share.

Investors who bought shares of LLY early on have clearly done well, but is it too late for new shareholders to get in on Eli Lilly’s growth?

What’s Driving Eli Lilly Shares Higher?

One of the key reasons behind LLY’s recent increase is the introduction of its weight loss drug Zepbound. This drug, the company’s answer to competitor anti-obesity drugs like Ozempic, has been shown to reduce mean body weight by over 20% in as little as 36 weeks. These results could be a game-changer when it comes to managing weight in those struggling with chronic obesity.

Despite having only received approval in November, Zepbound is already becoming widely popular. Earlier this month, CEO David Ricks revealed that Eli Lilly was already achieving 25,000 new Zepbound prescriptions per week at the end of December. With plans for increased production already in motion, Zepbound could become a cornerstone of the company’s growth strategy going forward.

Eli Lilly’s performance over the last year has also put upward pressure on share prices. In Q3, the company reported year-over-year revenue growth of 37% to a total of $9.5 billion. Much of this growth was driven by three new drugs the company has rolled out, not including Zepbound. Eli Lilly also sold the rights to one of its drugs for $1.4 billion, which contributed to the high rate of revenue growth.

Despite stellar revenue growth, the company failed to turn a profit in Q3. Net income per share was -$0.06. Looking forward, however, analysts expect LLY to return to robust profitability in 2024. Over the past 12 months, the company has generated earnings of $5.52 per share and cash flow of $9.31 per share.

Has LLY Run Too Far for Value Investors?

At first glance, Eli Lilly’s recent run-up makes the stock look fairly expensive. LLY shares trade at 50.8x forward earnings, a range that will require very rapid growth to justify. The price-to-cash-flow is even higher at 69.4, and the stock’s 18.8 price-to-sales ratio is also high enough to raise investor concerns.

Luckily for LLY investors, the news isn’t all bad on the valuation front. While still higher than ideal, Eli Lilly’s price-to-earnings-growth ratio of 2.0x is more reasonable than many of its other metrics. Bearing in mind that analysts expect Eli Lilly’s earnings to grow at a rate of over 20% annually in the coming five years, there’s at least a chance for the company to live up to its high valuation.

Investors should also consider LLY’s appealing dividend when valuing the stock. The company announced a 15% dividend increase in December, bringing its quarterly payout to $1.30. This trend has held steady for several years, as the previous three years’ dividend growth rate averaged 15.2%. With management rapidly stepping up the amount of cash it is returning to shareholders, those who buy and hold LLY for the long run could have a strong dividend growth asset in their portfolios.

What Could Bog Eli Lilly Down?

The clearest risk for LLY investors today is the fact that the market is pricing in very high levels of earnings growth. 

Debt could also be an issue for Eli Lilly if it fails to achieve rapid growth. At 1.6 times equity, the company’s long-term debt is well outside what most investors would consider a safe range. In each of the last three quarters, the company’s debt has grown by over 20%. While Eli Lilly may have good growth prospects, it appears that much of that growth is being fueled by borrowing.

Finally, investors must decide whether Eli Lilly can translate its exceptional revenue growth into equivalent earnings growth.

Management is clearly building the company’s sales, but the loss in Q3 raises questions about how long it will be before profits follow. To answer this, it’s worth looking at the company’s earnings history. Q3 was the first losing quarter since 2018, suggesting that the quarterly loss was more likely a blip on the radar than the beginning of a larger trend.

Is LLY a Buy, Sell or Hold?

Despite high valuation metrics, there’s a lot to like about Eli Lilly at the moment. The new drugs that drove Q3’s revenue growth, combined with Zepbound, will likely provide a solid base for the company as it continues to expand. The company also has a novel Alzheimer’s medication in its pipeline that could provide similar sales and price support once approved.

In the short term, the stock is likely to remain fairly close to its present level. This view is reflected in analysts’ price forecasts, which see the stock climbing just 6.1% to reach a median target of $647.29.

Eli Lilly’s value proposition is in its multiyear performance, though, meaning that investors who purchase the stock at today’s prices should likely be willing to buy and hold.

A final consideration in Eli Lilly’s case is the effect of potentially lower interest rates in 2024. Since LLY is priced more like a long-term growth stock than a mature company at the moment, there is a good chance that it will react to lower interest rates by rising. The Federal Reserve expects to cut interest rates three times in 2024, a fact that could benefit growth stocks like Eli Lilly.

LLY ultimately appears to be a moderate buy. Though the stock may go through its ups and downs as management executes its growth strategy, Eli Lilly as a whole still appears to have plenty of room to grow as a business. This fact, combined with the company’s reliable history of profitability and rapid dividend increases, suggests that it’s not too late for investors to see at least decent gains from the stock.

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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.