Today’s stock traders are talking about Eli Lilly (NYSE:LLY), and you may be tempted to buy shares now. It’s wise to hold off for a couple of weeks, though, since Eli Lilly may be overvalued and vulnerable to a share-price pullback. Sure, I’m interested in Eli Lilly’s new drug-use development and you should be, too, but I am still neutral on LLY stock.
Eli Lilly is a well-known American drugmaker that might be described as a “Big Pharma” company. LLY stock is sometimes known as a “safety” stock or a defensive pick because people need to take their medications even if there’s a recession.
If might not always be “safe” to hold Eli Lilly stock through earnings events, however. This is particularly true since, as we’ll discover, Eli Lilly’s valuation is higher than some prudent investors might want it to be.
New Uses for Eli Lilly’s Obesity Drug?
As you may already be aware, weight-loss drugs are all the rage on Wall Street as well as in the medical community. Not only can these medications provide substantial revenue streams for drugmakers like Eli Lilly, but they might also have added use cases outside of obesity treatment.
Just to recap, popular obesity treatments (formally known as GLP-1 agonists) include Eli Lilly’s tirzepatide and Novo Nordisk’s (NYSE:NVO) semaglutide. A recent study suggests (albeit not conclusively) that certain GLP-1 agonists may potentially offer benefits for patients with neurological conditions such as Parkinson’s disease.
The medical possibilities are exciting to think about. Moreover, today’s stock traders are fascinated with the news that Eli Lilly’s tirzepatide (marketed in the U.S. under the brand name Zepbound) was found to significantly reduce the severity of sleep apnea by as much as nearly two-thirds in obese adults in Phase 3 clinical trials.
Interestingly, Eli Lilly stock only moved slightly higher on this news, but maybe the stock already ran its course, as we’ll discuss in a moment. For now, though, it’s certainly noteworthy that tirzepatide could potentially target an obstructive sleep apnea patient population of 80 million U.S. adults.
Granted, Eli Lilly and other drugmakers might have to launch an awareness campaign to fully capitalize on this opportunity. According to Jeff Emmick, senior vice president of product development at Eli Lilly, 85% of obstructive sleep apnea cases “go undiagnosed and therefore untreated.” That sounds like a health hazard, so hopefully, Eli Lilly will be able to make tirzepatide widely available to the patients who could benefit from it.
Mark Your Calendar, and Prepare for “Marginal” Downside
Is it a good idea to jump headfirst into the trade and load up on LLY stock, though? I feel it’s wise to hold off for a little while, as there’s a major event coming up before the month is over.
Specifically, Eli Lilly is set to release its first-quarter 2024 earnings results on April 30, the last day of the month. Collectively, Wall Street’s analysts expect Eli Lilly to have earned $2.47 per share during that quarter.
Will the company clear that bar? It’s hard to say, at this point. For what it’s worth, Eli Lilly managed to earn $2.49 per share in the previous quarter, Q4 of 2023. However, the company only earned $1.62 per share in the year-earlier quarter, Q1 of 2023.
It’s really hard to know what to think, to be honest. Leerink analysts anticipate “marginal” downside to Eli Lilly’s sales in Q1, but they also assigned an Outperform rating and an $821 price target on LLY stock. The point is that it’s risky to try to guess the outcome of Eli Lilly’s upcoming earnings report.
On top of all that, Eli Lilly stock looks susceptible to an earnings-event drawdown because the company is very richly valued now. Bear in mind that the share price has flown from $375 to around $750 during the past 12 months, probably due to the hype surrounding obesity drugs.
Consequently, Eli Lilly has a GAAP trailing 12-month price-to-earnings (P/E) ratio of 128.75x versus the sector median P/E ratio of 32.85x. This might help to explain why LLY stock didn’t move much despite today’s positive news for tirzepatide; the stock is getting heavy, and the buyers are getting exhausted.
Is Eli Lilly Stock a Buy, According to Analysts?
On TipRanks, LLY comes in as a Strong Buy based on 16 Buys and three Hold ratings assigned by analysts in the past three months. The average LLY stock price target is $854.63, implying 14% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell LLY stock, the most accurate analyst covering the stock (on a one-year timeframe) is Terence Flynn of Morgan Stanley (NYSE:MS), with an average return of 53.99% per rating and a 100% success rate. Click on the image below to learn more.
Conclusion: Should You Consider Eli Lilly Stock?
Eli Lilly is a premier American drugmaker, and it’s exciting to think about the possible health benefits that tirzepatide may offer. Yet, prospective investors should look at the bigger picture since the market has already attributed a very high valuation to Eli Lilly.
With that in mind, the market might sell Eli Lilly shares if April 30’s earnings report is anything less than stellar. Hence, while I’m usually bullish on Eli Lilly, currently, I’m neutral on LLY stock and am not considering it for a portfolio position.
