The market appears to be recovering today, with green across the board. However, one standout is Eli Lilly, which is down about 7% today and has seen a 21% decline over the past few months. So why is it down today, and is this a great opportunity to buy the dip? Let's dive into the reasons behind the drop and explore the potential for investors.
The primary reason for Eli Lilly's decline is the company's weaker-than-expected revenue outlook for the fourth quarter. They have projected revenue of $13.5 billion, falling short of the anticipated $13.93 billion. Additionally, their ZET bound sales are expected to reach only $1.9 billion, below the forecast of $2.14 billion. Another factor contributing to the drop is Eli Lilly's announcement that they plan to acquire Scorpion Therapeutics' experimental cancer therapy for $2.5 billion. While this acquisition aims to strengthen their oncology portfolio, such a large investment can raise concerns among investors about the short-term financial impact.
At present, Eli Lilly's stock is down about 6%, and over the past six months, it's down by 21%. It has also decreased by 3% in 2025 alone. However, for long-term shareholders, the company has significantly outperformed the S&P 500, with a remarkable 960% increase in value. Interestingly, Eli Lilly is currently trading at the lower end of its 52-week range. Both Seeking Alpha and Wall Street have assigned a "Buy" rating to the stock. The company also pays a dividend, which we will discuss further, and is performing well compared to its five-year average.
Earning Overview
When looking at earnings, analysts expect not only growth but also a substantial year-on-year increase in earnings per share (EPS). Despite missing the previous quarter's estimate by 29 cents, Eli Lilly has beaten expectations in three of the past four quarters, giving it a 75% track record. With an EPS of $225.57 for this year, the company is currently trading with a forward price-to-earnings (P/E) ratio of 35.3, which is a bit lower than the high valuations it's been trading at in the past.
Fundamental Analysis
Looking at Eli Lilly’s sales growth over the longer term, we typically expect companies to see growth between 3% to 7% annually, with 3% to 4% being in line with inflation. Over the past year, Eli Lilly has posted strong double-digit growth, but there’s a question about whether the high valuation of the company aligns with this growth. While their top-line revenue has increased over time—from $20 billion ten years ago to $34 billion today, and an anticipated $41 billion over the trailing 12 months—it’s worth noting that their revenue has more than doubled during this period.
Regarding shares outstanding, Eli Lilly hasn't been consistent with buybacks, although there were aggressive buybacks from 2018 to 2019. Since then, buybacks have been relatively flat, but we always consider this as an additional benefit on top of dividend increases. In terms of return on invested capital (ROIC), the company has been performing well, with a 33% increase over the past 12 months, which shows strong capital allocation. Operating margins are impressive, well above the minimum expected 12%, and have increased from 17% to 36% in the latest quarter.
The reason we’re highlighting Eli Lilly's performance is to dive into the bottom-line net income and what story it tells. Over the past 10 years, there has been a lot of inconsistency in the company’s net income—$2.4 billion in 2014, rising to $5.2 billion in the latest annual report. This inconsistency is something to keep in mind, but we always apply a margin of safety when evaluating the stock.
Looking at the balance sheet, the health check reveals that total cash has decreased over the long term, from just under $5 billion in 2014 to around $3.5 billion in the latest quarter. However, isolating this number doesn’t provide much insight, so we compare it to total debt. Over the same period, debt has significantly increased, from $8.2 billion to $31.2 billion. While the net debt-to-EBITDA ratio isn't excessively high, it’s still worth monitoring on a quarterly and yearly basis.
Free Cash Flow
Their free cash flow has been fairly consistent, though there was a dip in 2023. This is something to watch, but based on their expected free cash flow over the next 12 months, we anticipate strong margins. The net debt-to-EBITDA ratio, which we like to keep below 3, is currently at 2.25 over the trailing 12 months and is expected to drop to 1.17 in the coming year, signaling no major concerns regarding debt.
As for the balance sheet, the company’s position looks solid, with no significant red flags. We’ll cover this in more detail later. Additionally, we’ve released our latest free weekly article highlighting undervalued stocks and market developments, which you can access by clicking the pinned comment below.
Cash flow from operations has been somewhat inconsistent but has generally been increasing over the long term. It was $4.5 billion about 10 years ago and is now sitting at $6.1 billion.
Dividend
In terms of dividend safety, Eli Lilly scores 96, indicating that it's a very safe dividend payer. The company has consistently increased its dividend, including a 15% hike last month. Over the past five years, their dividend growth has averaged 15% annually, and even over the past 20 years, they've maintained a 6% growth rate, surpassing the target inflation rate of 4%. The company has raised dividends for the last nine years without a reduction and has consistently paid out for 33 years.
Valuation
Looking at valuations, Eli Lilly is currently trading at the lower end of its "blue tunnel" fair price range, suggesting it may be undervalued. The forward P/E ratio is below its five-year average of 36.6 and well above the healthcare sector average of 16.3, indicating that Eli Lilly trades at a premium. Another positive sign is that free cash flow is projected to drop to 49% over the next 12 months, signaling that dividend increases may continue at an attractive rate. Despite a negative cash flow in 2023, the company’s free cash flow should improve in the coming year, which is a good sign for long-term growth.
Moving on to valuation, our discounted cash flow (DCF) model suggests an intrinsic value of $631 per share, which implies a 15% downside. However, these numbers are subjective, and you can access a copy of this model by clicking on the pinned comment below and adjusting the inputs to your own preferences. If we use a higher growth rate of 25%, the intrinsic value rises to $859, indicating a 16% upside. For a 30% growth assumption, the intrinsic value goes above $1,100, implying a 57% upside.
When it comes to grading, Eli Lilly receives an "F" for valuation. Its price-to-earnings ratio (non-GAAP) is currently around 35, which reinforces the conclusion that the company trades at a significant premium compared to its sector. This trend remains consistent across various valuation metrics. However, when we look at growth, Eli Lilly earns an "A+" for year-on-year growth, with an impressive 27% growth rate, compared to the sector’s 7.5%. Forward-looking, the company is expected to grow at 27% versus the sector's 7.8%. Moreover, its earnings per share (EPS) growth over the next 3 to 5 years is projected at 38%, significantly higher than the sector's 10.7%.
Profitability also earns an "A+" grade, with strong margins: 81% versus 59%, and a 20.5% bottom-line margin. In contrast, the sector is seeing negative cash flows, with an operating loss of 4%, while Eli Lilly has $6 billion in cash from operations, compared to the sector's -$15 million.
To summarize, Eli Lilly receives a double buy rating from both Seeking Alpha and Wall Street, an "F" for valuation, "A+" for growth, and "A+" for profitability. Let’s now take a look at how it compares to other major pharma companies. Despite a 7% dip today, Eli Lilly remains one of the best-performing companies in the sector. Over the last year, the stock is up 18%, significantly outperforming its competitors, who generally show negative returns. Over the last 5 years, Eli Lilly has surged 462%, and over the past decade, its growth has been a massive 1,168%.
Comparing it to the S&P 500, Eli Lilly has outperformed across the 1-year, 5-year, and 10-year periods.
Insider Ownership
In terms of insider ownership, Eli Lilly insiders own around 1.3% of the company, and there have been $1.15 billion in sales over the last year. There hasn’t been much movement in Q1 2025, but in previous quarters, there were some notable sales, with the chief accounting officer selling around 900 shares in November for $723,000. Insider selling is typically not a bearish signal, as insiders sell for various personal or financial reasons.
Institutionally, 83% of the company is owned by institutions, which have sold $31 billion in stock over the past year but bought $45 billion during the same period. In Q4 2024, institutions were net sellers, which is something to keep in mind, although overall, they were bullish on Eli Lilly throughout 2024. As always, it’s important to conduct your own due diligence and not simply follow institutional or insider activity.
Finally, the company’s income statement shows solid growth over the long term, with a strong double-digit growth expected heading into 2024 based on the trailing 12-month figures.
Technical Analysis
Technical analysis has identified several key support and resistance levels for LLY:
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Support Levels:
First Support: Approximately $747.50Second Support: Around $737.39Third Support: Near $728.39Additional Support Zone: Between $724.87 and $727.19, formed by multiple trend lines across different time frames
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Resistance Levels:
First Resistance: Approximately $766.61Second Resistance: Around $775.61Third Resistance: Near $785.72Additional Resistance Zone: Between $774.67 and $800.09, formed by multiple trend lines and important moving averages across different time frames
These levels are derived from technical analysis and may vary depending on the source. It's important to note that stock prices are subject to market volatility, and these levels can change over time. For the most current information, it's advisable to consult real-time financial platforms or a financial advisor.
Risk And Challenges
To be more conservative, we’re using the lower growth rate of 20%, which suggests that Eli Lilly currently doesn't offer a margin of safety. At today’s prices, you’d be paying a premium for the stock. For us to consider buying, we would need at least a 10% margin of safety, meaning we’d wait until the stock price falls below $600. It may never hit that mark, but this is where we’d consider entering.
Wall Street’s target price is well over $1,000, suggesting 43% upside. So while Eli Lilly doesn’t offer a margin of safety at the moment, it remains highly rated by analysts.
In terms of positives, Eli Lilly has a robust pipeline, especially in high-growth areas like diabetes, weight loss, and oncology. Their weight loss drug is expected to dominate a booming market, and the company has consistent revenue growth, driven by strong demand for existing products and new treatments. They invest heavily in R&D, particularly in treatments for obesity, Alzheimer’s disease, and cancer, and are a leader in therapeutic areas, giving them a competitive edge.
However, some risks to consider include the high valuation, reliance on their weight loss drug, setbacks in drug development, potential regulatory issues, competition from companies like Novo Nordisk, and the expiration of patents.
Conclusion
In conclusion, while Eli Lilly faces some short-term challenges, the company's strong track record, dividend growth, and potential for long-term earnings growth make it an intriguing option for long-term investors.
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