Concerns about inflation -- and now, a possible recession -- have led the S&P 500 index to drop 17% so far this year. But some stocks have fared much better than the broader market.
The pharma stock Eli Lilly (LLY +0.70%) has surged 13% higher year to date. But has the stock's rally made it too expensive? Let's dive into Eli Lilly's fundamentals and valuation to find out.
NYSE: LLY
Key Data Points
The company is growing quickly
Eli Lilly reported $7.8 billion in revenue for the first quarter ended March 31, up 14.8% from the year-ago period. How did the large-cap company deliver double-digit revenue growth to its shareholders in the first quarter?
For starters, its COVID-19 antibodies treatment generated $1.5 billion for the company in the first quarter, up 81.4% year over year. This was due to an agreement the company reached to supply the U.S. Government with 600,000 doses by March 31 in order to provide more treatment options to patients diagnosed with COVID-19.
Aside from Eli Lilly's COVID-19 antibody drug, other key products that contributed to its growth were the type 2 diabetes medication Trulicity and the breast cancer drug Verzenio. Trulicity recorded $1.7 billion in revenue during the quarter, a gain of 19.9% from the year-ago period. And Verzenio's revenue soared 74.5% higher to $469 million.
Eli Lilly posted $2.62 in non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter, which was 62.7% higher than the same period of the previous year. This sizzling growth was due to two factors.
First, the company's higher revenue base and enhanced operating efficiency led its non-GAAP net margin to rocket 890 basis points higher year over year to 30.4%. Second, the company's weighted-average, diluted share count declined by 0.7% to 906 million shares for the quarter. This was due to share repurchases executed during the first quarter.
Image source: Getty Images.
Double-digit dividend growth won't end soon
Eli Lilly will likely have little difficulty in continuing to raise its dividend at a double-digit rate annually for the foreseeable future. That's because of the company's growth prospects and its sustainable dividend payout ratio.
Thanks to the company's pipeline of several dozen compounds in different stages of clinical trials, analysts believe that Eli Lilly will produce 14.5% annual earnings growth over the next five years. The compound that has arguably the greatest sales potential for the company is Mounjaro. The drug was recently approved by the U.S. Food and Drug Administration (FDA) to treat patients with type 2 diabetes. And it may even eventually be approved by the FDA as a chronic weight management treatment.
With a payout ratio set at 50% in 2022, Eli Lilly's dividend should be able to grow about as fast as earnings. This is why annual dividend growth around 15% should persist over at least the next several years.
The stock's 1.3% dividend yield is moderately lower than the S&P 500's 1.6% yield. But the blazing growth potential of the dividend makes up for the low starting yield.
The valuation isn't cheap
The strength and quality of Eli Lilly are borne out by its valuation. Presently, the shares trade at a forward price-to-earnings ratio (P/E) ratio of 32, which is nearly triple the general drug manufacturer industry average of just under 12. But the stock isn't quite as overvalued as it may initially appear. This is because Eli Lilly's 14.5% annual earnings growth outlook is more than double the industry forecast of 7%.
From my perspective, Eli Lilly looks moderately overvalued at the current $313 share price. But if investors have confidence that the company can deliver the growth that analysts are expecting, the stock looks like it could still outperform the broader market.
