Eli Lilly (LLY 0.55%) is a growth machine, with its business taking off due to its wildly successful diabetes drug Mounjaro, which recently was approved for weight-loss treatment under the name Zepbound. It could end up being the company's top seller in the near future. There is no shortage of reasons to be bullish on the company.
Its sales have been rising at a rapid rate. But as impressive as its growth has been, there's another number that looks even better -- one that investors should pay attention to, and which could ensure its valuation continues to rise significantly.
Eli Lilly's operating income rose by 75%
For the three-month period ended June 30, Lilly's revenue increased by 36% year over year to $11.3 billion, thanks in large part to the growth in Mounjaro and Zepbound. But what was particularly impressive was that the company's operating income increased even faster: 75%, rising to $3.7 billion.
This is particularly impressive given that the company incurred asset impairment and restructuring charges totaling $435 million during the period (it didn't have any such charges in the prior-year period).
And with the sharp increase in operating income, the company was ultimately able to see its net income climb by 68%, to just under $3 billion. Earnings growth of that rate is a key reason investors aren't dissuaded by the healthcare stock's lofty $830 billion valuation.
If not for a high expected earnings growth rate, investors might feel a lot more bearish on a stock, which is trading at more than 100 times its trailing profit. But with a lot of growth to come, and its earnings likely improving in the near future, it's one of the reasons the stock might not be as expensive as it appears to be.
High margins can set the stock up for success in the long run
A company's gross profit margin can be an underrated number for investors to focus on. It doesn't get as much attention as the top or bottom lines, but it does give investors insight into how efficient a company's operations are. Wide margins mean that the business is incurring fairly low cost of sales, and a lot of the incremental sales growth the company generates will end up flowing through to the bottom line and boost earnings.
Last quarter, Lilly's gross profit margin was 81%. And while revenue rose by 36%, the company's cost of sales increased by only 20%. If it can continue this trend, that can result in a lot more earnings growth. Historically, the company has had little problem in maintaining fairly high gross profit margins.
LLY gross profit margin (quarterly); data by YCharts.
Eli Lilly is still a fantastic buy right now
Lilly's sales are likely to rise at a high rate. And with an impressive gross profit margin, investors should feel confident in its ability to increase its earnings at a fast rate as well.
The company's biggest challenge these days is producing enough products to meet soaring demand. And with strong margins and profits, it is in an excellent position to invest in its operations to bolster its manufacturing and ensure it remains a dominant player in diabetes care and weight loss for years to come.
With strong growth prospects and impressive margins, Eli Lilly stock can make for an excellent investment to add to your portfolio and just hang on to for years.
