The consumer price index increased 7.7% year over year in October, a solid signal that the inflation rate is now trending in the right direction. Still, the rate is far above the Federal Reserve's target of 2%.
Due to the long journey that still lies ahead to tame inflation, the S&P 500 index has fallen 16% so far in 2022. But some stocks have fared considerably better than the index to date.
The pharma stock Eli Lilly (LLY -1.00%) is chief among these stocks. Why has the stock surged 33% so far in 2022? And can it continue to outperform the market in the years to come? Let's take a look under the hood at Eli Lilly's fundamentals and valuation to decide.
Eli Lilly has a top-notch product portfolio
Founded in 1876, Eli Lilly eventually blossomed into the second-largest pharmaceutical company in the world with a $343 billion market capitalization. It trails only Johnson & Johnson's $459 billion market cap.
Led by its mega-blockbuster (a pharmaceutical with $5 billion-plus in annual revenue) type 2 diabetes drug named Trulicity, Eli Lilly boasts an enviable product portfolio. The company also has six products on track to be blockbusters ($1 billion-plus in annual revenue) in 2022. These include its COVID-19 antibodies treatment, the immunology drug Taltz, the cancer drug Verzenio, the insulin medicines Humalog and Humulin, and the type 2 diabetes and heart failure medication Jardiance.
These drugs and nine other products in its portfolio helped Eli Lilly boost revenue 2.5% year over year to $6.9 billion in its third quarter. The company's extensive international presence led to its products being sold in 120 countries around the world. Revenue growth would have been 7% for the quarter were it not for unfavorable currency conversion rates.
Turning to the bottom line, Eli Lilly recorded $1.98 in non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter. For context, this was up 11.9% over the year-ago period. This robust growth in earnings was driven by a 190 basis point increase in non-GAAP net margin to 25.8% in the quarter. Along with a 0.8% reduction in its outstanding share count, this explains how Eli Lilly's adjusted diluted EPS growth far outpaced its revenue growth for the quarter.
Image source: Getty Images.
Eli Lilly's growth could accelerate in the future
The biggest catalyst for Eli Lilly's impressive stock performance in 2022 has been the U.S. Food and Drug Administration's (FDA) approval of its type 2 diabetes drug Mounjaro in May. The third quarter marked the first full quarter since its launch in the United States. And with $97.3 million in revenue, the drug is off to a great start. This is especially the case now that the drug received regulatory approvals for type 2 diabetes in the European Union and Japan during the third quarter.
In fact, the type 2 diabetes indication alone could be a mega-blockbuster for Eli Lilly. But the real growth potential for the drug is if it is approved by the FDA and other agencies around the world to treat obesity. This is why analysts believe that Mounjaro alone could bring in annual peak sales of $25 billion for Eli Lilly. For context, that is nearly as much as the $28.6 billion revenue estimate for the entire company in 2022.
And given that Eli Lilly has nearly 70 other projects in clinical development or awaiting regulatory approval, analysts are forecasting 19.1% annual adjusted diluted EPS growth through the next five years.
Eli Lilly has a dividend with rapid growth potential
Eli Lilly's 1.1% dividend yield is significantly below the S&P 500 index's 1.6% yield. But the company's red-hot growth prospects should translate into strong dividend growth moving forward.
That's because Eli Lilly's dividend payout ratio should come in at around 50% in 2022. This leaves the company with the capital necessary for bolt-on acquisitions and debt repayment, which could mean as much as 20% annual dividend growth for the foreseeable future.
Quality comes at a price
Eli Lilly demands a very high valuation compared to its industry peers. Yet for investors with a five-plus-year time frame, the valuation still appears reasonable.
Eli Lilly's forward price-to-earnings (P/E) ratio of 39.3 is triple the drug manufacturer industry average forward P/E ratio of 12.3. But the company's 19.1% annual earnings growth forecast is roughly triple the drug manufacturer industry average annual growth outlook of 6.9%. Taking these factors into consideration, Eli Lilly is only a bit expensive compared to its peers on a pound-for-pound basis. This is why it wouldn't be surprising if the stock continued to crush the S&P 500 index in the years ahead.
