Eli Lilly (LLY) has been strong this past year, rallying more than 18% over the past year. Taking a closer at the stock, it seems like the market has gotten ahead of itself. Here are six points to look at while considering the case for investing in Lilly:
Valuation: Ely Lilly’s trailing 5-year valuation metrics suggest that the company is undervalued. Lilly’s current P/B ratio is 3.1 and it has averaged 4.1 over the past 5 years with a high of 6.8 and low of 2.8. Lilly’s current P/S ratio is 1.9 and it has averaged 2.3 over the past 5 years with a high of 3.8 and a low of 1.7. Lilly’s P/E ratio is 9.5 and it has traded at a P/E between 8 and 10 over the past year.
Price Target: The consensus price target for the analysts who follow Lilly is $38.75. That is downside of nearly 3% from LLY’s current stock price. This suggests that the stock is overvalued. Analysts usually are bullish on stocks.
Forward Valuation: Analysts forecast that Lilly will earn $3.41 per share next year. With a current stock price of $39.88, that is a forward P/E multiple of 11.7. Although there are no direct comps because of patents and proprietary products involved, it makes sense to look at what other large drug stocks are trading at. Abbott (ABT) is trading 11.1 times next year’s earnings. Merck (MRK) is trading 10.0 times next year’s earnings. Pfizer (PFE) is trading 9.3 times next year’s earnings. Lilly is trading above the mean forward P/E for the four large-cap drug stocks, but still stacks up well against Pfizer on a dividend basis.
Earnings Estimates: Lilly met EPS estimates its last two quarters and had small EPS beats the two quarters before that. This suggests there won’t be any upside earnings surprises any time soon for the company as analysts have a good idea of where earnings will be.
Free Cash Flow: Lilly generates significant free cash flow and averaged $5.4 billion in free cash over its past three fully reported fiscal years. Some of that cash has gone to business expansion and some of it has been returned to shareholders through dividends. Lilly has paid out over $2 billion in dividends in each of its last three fully reported fiscal years. In the first 9 months of 2011, the company generated free cash flow of nearly $5 billion and has paid out $1.6 billion in dividends.
Lilly’s current quarterly dividend is 49 cents a share, which is a yield of nearly 5%. The company has paid a dividend since 1972 and the payout has been stable since 2009.
Price Action: Lilly’s stock has been on a roll this year, up more than 18% over the past year. After reaching new highs at slightly under $42 a share in early January, the stock ran into some pressure and fell to under $40 a share. The stock is 3% above its 50-day moving average. The next level of strong support is around $38.50, where the 50-day moving average currently is. This is also the price level the stock tried to penetrate multiple times over the past year and wasn’t able to until early December.
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Conclusion: Lilly has been really strong over the past year and this performance is supported by its cash flows. However, I agree with analysts here and it seems like the stock has limited upside from these levels. It is also trading at a premium to other large-cap pharmaceutical stocks and that makes this a risky investment at these price levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.