Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Eli Lilly (LLY -1.06%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Lilly's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Lilly's key statistics:
LLY Total Return Price data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
0.9% |
Fail |
|
Improving profit margin |
9.2% |
Pass |
|
Free cash flow growth > Net income growth |
(15%) vs. 10.2% |
Fail |
|
Improving EPS |
10.1% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
84% vs. 10.1% |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
LLY Return on Equity data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(27.5%) |
Fail |
|
Declining debt to equity |
(48.1%) |
Pass |
|
Dividend growth > 25% |
0% |
Fail |
|
Free cash flow payout ratio < 50% |
51.3% |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
How we got here and where we're going
Lilly doesn't look too impressive here, as it's mustered only three out of nine possible passing grades. The company's falling free cash flow hurts it in multiple ways, as recent dividend payouts now account for more than half of annualized free cash flow levels. The rush to safety that's typified gains for many large pharmaceutical stocks is certainly active here as well, since Lilly's total returns have far outpaced the growth in its bottom line. Investors should hope that Lilly's fundamentals can pull back in line with its share price. Will that happen soon? Let's dig a bit deeper to find answers.
Despite declining Zyprexa sales due to the loss of patent exclusivity, Lilly's net revenue still rose 6% year over year in its latest quarter. However, my fellow Fool Sean Williams notes that the impending patent expiration of blockbuster drugs Cymbalta and Humalog, which represent about 30% of Eli Lilly's total revenue, will force the company into increased competition with generic drug manufacturers and is quite likely to dent profitability as well. In addition to this, Lilly's Alimta cancer treatment and its animal health business have not been generating their hoped-for results, either. However, Cialis, Effient, and Strattera held up overall sales growth in the latest quarter.
Lilly recently completed a phase 3 trial of its lung cancer drug necitumumab, which was tested on patients with stage IV metastatic squamous non-small cell lung cancer. Fool contributor Keith Speights notes that the company will make an application for regulatory approval by the end of next year. In the near future, necitumumab should provide a tailwind for Lilly's revenue growth, as cancer drugs made an estimated $75 billion in global sales during the last year. In addition, Lilly's migraine drug LY2951742 is currently in a mid-stage clinical trial, which is expected to wrap up by the end of October. Lilly and its research partner Boehringer Ingelheim have also submitted a New Drug Application for diabetes drug empagliflozin, which will enable them to compete in an increasingly crowded field.
Putting the pieces together
Today, Eli Lilly has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
