Has Eli Lilly Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Eli Lilly (NYSE: LLY  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Eli Lilly.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.1%

Fail

 

1-Year Revenue Growth > 12%

(7.1%)

Fail

Margins

Gross Margin > 35%

78.5%

Pass

 

Net Margin > 15%

18.2%

Pass

Balance Sheet

Debt to Equity < 50%

34.4%

Pass

 

Current Ratio > 1.3

2.02

Pass

Opportunities

Return on Equity > 15%

26.5%

Pass

Valuation

Normalized P/E < 20

17.36

Pass

Dividends

Current Yield > 2%

4.1%

Pass

 

5-Year Dividend Growth > 10%

3.2%

Fail

       
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Eli Lilly last year, the company managed to hold onto the point it picked up between 2010 and 2011. The stock has also done exceedingly well, rising more than 30% over the past year.

Eli Lilly has faced the same patent-cliff issues that have plagued many other pharmaceutical stocks over the past year. Just as Merck (NYSE: MRK  ) has had to deal with the loss of patent protection on Singulair and Pfizer (NYSE: PFE  ) went over the patent cliff with its blockbuster Lipitor, Lilly has seen revenue plunge following the loss of patent exclusivity for its anti-psychotic drug Zyprexa. With Zyprexa producing $4.6 billion in sales last year, the revenue reduction so far this year of 68% has hurt the entire company.

But Lilly has stepping up to the challenge with some pipeline successes. After Lilly ended its partnership with Amylin Pharmaceuticals, which Bristol-Myers Squibb (NYSE: BMY  ) and AstraZeneca (NYSE: AZN  ) recently bought, Lilly's dulaglutide diabetes drug beat Amylin's Byetta, as well as Merck's Januvia in a phase 3 trial. If the drug is successful in its other trials, then it could become a force to be reckoned with in the diabetes space. In addition, Lilly's Alzheimer's drug solanezumab and stomach cancer drug ramucirumab have both created excitement among investors thanks to some positive trial results.

Still, Lilly has still more drugs coming off patent in the near future, with both Cymbalta and Humalog also contributing substantial portions of the company's revenue. In order for Lilly to justify its big stock-price rise and improve, it needs to demonstrate that its pipeline will develop into big blockbusters of the same magnitude as the drugs it's currently losing. If it can do so, Lilly could see sales jump and get closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Lilly is just one of the many drug companies facing big patent cliffs. Merck has had big breakthroughs for nearly 100 years, but its top-selling drug now faces generic competition.  Will Merck crumble under its own weight, or will it continue to pay dividends to investors for another century? To find out if this pharma giant has the stamina to keep its Bunsen burners alight, grab your copy of our brand new premium research report today. Our senior biotech analyst, Brian Orelli, Ph.D., walks you through both the opportunities and threats facing Merck, and the report comes with a full 12 months of updates. Claim your copy now by clicking here.

Click here to add Eli Lilly to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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