Eli Lilly's (LLY -0.13%) share price has soared over the past five years (up 530%). In fact, it's hard to find a single pharmaceutical giant that has performed better over this period. However, some might think that the company's stock is no longer worth buying at current levels. After all, Eli Lilly stock is trading at 27 times forward earnings. That's meaningfully higher than the 18.3 average for the healthcare sector.
But Eli Lilly's shares do remain attractive. Let's look into one metric that strongly suggests so.
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Lilly looks more reasonable when you add growth into the equation
The forward price-to-earnings ratio (P/E) is one of the more popular valuation metrics, and with good reason. Instead of focusing on past performance -- which is helpful but doesn't tell us a whole lot about a corporation's prospects -- the forward P/E is, well, forward-looking. However, like every financial metric known to man, it also has its drawbacks, one of which is that it doesn't account for growth. Even an expensive-looking stock can be considered a bargain if its revenue and earnings are consistently growing at a rapid pace.
That's where the price/earnings-to-growth ratio (PEG) comes into play. This metric adds that crucial missing piece into the equation and helps paint a more accurate picture of a stock's valuation. What's Eli Lilly's current PEG? According to some estimates, it's 0.9. For reference, 1 and below are considered the undervalued range, while a stock with a PEG between 1 and 2 is considered fairly valued.
NYSE: LLY
Key Data Points
So, this metric tells investors that Eli Lilly is actually cheap, not expensive. It's no wonder: The company's revenue and earnings have been growing incredibly rapidly, and they look likely to continue doing so. Eli Lilly has taken over as the leader in the market for anti-obesity medicines. The company's Zepbound leads this space. And the best part is that analysts predict that this market will expand significantly over the next five years as demand for weight management medicines surges.
Will Eli Lilly have to worry about increased competition? Yes, but it isn't just the company's currently approved product that's best-in-class. Eli Lilly has posted mid- and late-stage clinical trial results that compare favorably to those of its peers in the industry. So, the company's medium-term prospects look attractive. Investors should expect strong top- and bottom-line growth through the end of the decade at the very least, which more than justifies Eli Lilly's current forward P/E.
An excellent stock to buy
It's not too late to invest in Eli Lilly, and that becomes even clearer once we look beyond its core area of expertise. Eli Lilly has made significant progress in markets such as oncology and immunology over the past few years, with medicines like the breast cancer drug Verzenio and the immunosuppressant Taltz still performing well. New launches, including Jaypirca and Omvoh, which treat lymphoma and ulcerative colitis, respectively, have also made progress.
And that's just the tip of the iceberg. Eli Lilly's business is robust and should continue driving market-beating returns over the next few years.
