Eli Lilly and Co. (NYSE:LLY), a pharmaceutical giant known for its innovative drugs, is trading near its all-time high after exceeding earnings expectations. Despite challenges in the drug pricing landscape, the company has maintained a solid financial performance. Furthermore, Eli Lilly’s focus on developing new weight loss treatments makes it an especially attractive pick for investors looking to get a piece of the healthcare sector. As a result, I’m bullish on the stock.
In the fourth quarter of 2023, Lilly’s revenue reached $9.35 billion, reflecting a substantial 28% increase year-over-year. The emergence of potentially new weight loss medications like the diabetes drug Mounjaro helped propel this strong performance. The company’s revenue has grown considerably over the past year, climbing from $7.30 billion in Q4 2022 to the most recent total. This growth is accelerating, significantly outpacing the returns of the S&P 500 Index (SPX).
However, investors should note Eli Lilly’s high valuation. Eli Lilly is trading at a forward price-to-earnings (P/E) ratio of 60.8, which is about triple the average of the S&P 500. Therefore, Therefore, it may be difficult for LLY’s earnings per share (EPS) to compound significantly enough in the foreseeable future relative to its elevated valuation. While the potential growth driven by its weight loss drugs is promising, a considerable portion may already be reflected in the current stock price.
Despite these concerns, analysts predict 21.17% annual revenue growth for Eli Lilly for 2024. This projection greatly exceeds the industry’s expected compound annual growth rate (CAGR) of 6.2%. Additionally, several analysts believe Mounjaro, marketed under the brand name Zepbound, has the potential to reach peak annual sales of $25 billion. If it achieves this level of sales, it would position the drug as one of the best-selling medications in the history of the pharmaceutical industry.
LLY: Strong Potential for Growth Despite Headwinds
Eli Lilly’s potential is certainly attracting significant investor attention. The company may become the first pharmaceutical company valued at a trillion dollars. Billionaire investor Ken Langone said, “I think Lilly will be the first trillion-dollar drug company in history. Why? Their pipeline. And god bless [former CEO] John Lechleiter. He simply said we’re not cutting back on R&D, but we’re going to focus, and we’re going to make sure that we get more bang for the buck than possible.”
Eli Lilly’s revenue growth has been significantly boosted by the introduction of new weight-loss medications like Mounjaro. Initially used for treating type 2 diabetes, Mounjaro has gained an expanded role with FDA approval for weight-loss treatment, contributing substantially to this growth. As a result, Lilly’s New Products category soared from virtually zero sales a year ago to $2.49 billion in the fourth quarter alone
Lilly recently introduced a direct-to-consumer website, LillyDirect, aimed at enhancing the sales of both treatments. Last week, Eli Lilly announced its partnership with Amazon.com’s (NASDAQ:AMZN) pharmacy division to facilitate the delivery of drug prescriptions ordered through LillyDirect.
Like Langone, Bank of America (NYSE:BAC) analyst Geoff Meacham attributes Lilly’s positive outlook to its potential for drug development. “While investors clearly recognize the commercial opportunity for Mounjaro (diabetes) and Zepbound (obesity), we’d argue that additional opportunities in heart disease, obstructive sleep apnea, and liver disease are vastly underappreciated,” said Meacham.
Not all recent news from the company has been positive, however. Earlier this month, Eli Lilly announced that the FDA had unexpectedly extended the deadline for its decision to approve the company’s experimental Alzheimer’s drug, donanemab. The announcement only slightly impacted the company’s valuation, indicating that the market had significantly reduced its expectations for a drug previously anticipated to be a blockbuster success.
LLY Boasts an Enviable Revenue/Earnings Outlook
In 2023, the company’s stock price soared by 59%, marking its second-best annual performance in 25 years and catapulting it to the position of the world’s largest pharmaceutical company by market cap. The stock may improve on that performance this year. Eli Lilly stock analysts expect first-quarter 2024 revenue to be $8.96 billion, a 29% increase in sales over the last quarter.
However, Eli Lilly’s operating cash flow was down to $4.24 billion in 2023, a 40.1% decrease compared to the previous year. The decline may have resulted from the company’s increased expenditures in research and development, which rose from $7.19 billion in 2022 to $9.31 billion in 2023.
Expectations for LLY stock are substantial, matched by similarly high expectations for its EPS growth rate. It’s easy to understand why. For Q4 2022, the company reported earnings per share (EPS) of $2.09. For Q1 2024, LLY management predicts a 5.7% rise in EPS to $2.56. Furthermore, analysts are forecasting that Eli Lilly will achieve EPS of $12.44 this year.
Last December, Eli Lilly’s board of directors also declared a 15% increase in the company’s quarterly dividend, setting the first quarter dividend for 2024 at $1.30 per share.
LLY Is a Strong Buy, According to Analysts
According to TipRanks, LLY is currently rated as a Strong Buy based on 16 Buys, three Holds, and no Sell ratings from financial analysts over the past three months. The average Eli Lilly stock price target is $830.67, implying 8.1% upside potential from its last price. These analyst price targets vary, ranging from a low of $610.00 to a high of $1000.00 per share.
Final Insight on LLY
Final insight on Eli Lilly’s continuing stock price surge reflects investors’ positive sentiment regarding its revenue and growth momentum. The company’s financials are strong across the board, and investors expect that the company’s new weight loss medications will exceed the bullish sales predictions. Despite a high P/E ratio, the company’s drug pipeline is full, suggesting the possibility of outperforming the industry growth average.
