Is Eli Lilly Stock Headed Toward $1300 Levels?

Eli Lilly stock (NYSE: LLY) has seen its stock rise by around 50% this year, outperforming the broader indices, with the S&P 500 up over 15%. The stock now trades at 63x projected 2024 earnings of $13.75 per share. Does this make the stock expensive? We don’t think so, considering that Eli Lilly’s revenues could grow over 75% from $34 billion in 2023 to over $60 billion by 2026, while earnings growth is expected to be over 3x for the same period, generating strong returns for shareholders. Here’s how this is possible.

Eli Lilly has seen a stellar run lately given the very high demand for its obesity drug – Zepbound – which, along with its diabetes drug – Mounjaro – is expected to garner $50 billion in annual peak sales. In fact, there is a shortage of Zepbound drug currently, and Eli Lilly will invest $9 billion in a manufacturing facility to keep up with its demand. Furthermore, Eli Lilly’s pipeline is expansive, with drugs under clinical trials in different therapeutic areas. If approved, these drugs could bring in significant incremental revenue. For perspective, Eli Lilly’s Alzheimer’s Disease treatment – Donanemab – was recently approved by the U.S. FDA, and it could garner $5 billion in peak sales. Some of its other drugs, including Verzenio and Zyprexa, are also doing well. Overall, Eli Lilly is poised to see a robust top-line growth in the coming years.

Eli Lilly expects its 2024 adjusted earnings to be in the range of $13.50 and $14.00, which is over 2x what it reported in 2023. The company will likely see strong earnings growth over 2023-2026, as the company’s past investments in R&D and product development have now started to pay off, along with continued expansion of its existing drugs’ portfolio.

The company saw its net income decline from $6.2 billion in 2020 to $5.2 billion in 2023. This can be attributed to the company’s non-operating expenses, primarily IPR&D. It rose from $660 million, or 2.7% of revenue in 2020, to $3.8 billion or 11.1% of revenue in 2023. The 2023 IPR&D expenses were associated with acquisitions of DICE, Versanis, Emergence Therapeutics, and Mablink Biosciences. On an adjusted basis, net income margin has contracted from 25.2% in 2020 to 16.7% in 2023. However, this metric is expected to rebound in the coming years. For perspective, Eli Lilly’s Q1’24 adjusted net margin stood at 26.6%, reflecting over 500 bps y-o-y rise.

Considering our revenue projections and expected margin expansion, $25 in adjusted EPS is likely possible by 2027, as compared to the $6.32 it reported in 2023. Now, if Eli Lilly’s earnings grow to $25, the forward P/E multiple will shrink to 34x in 2026 from its current level, assuming the stock price stays the same, correct? But that’s what Eli Lilly’s investors are betting will not happen! If earnings expand over 3x in the next few years, instead of the P/E shrinking from around 63x presently (based on expected 2024 earnings) to about 34x, a scenario where the P/E metric falls more modestly, perhaps to about 52x, looks more likely. This would make growth in Eli Lilly’s stock price be around 50%, to around $1,300 levels, likely over the next three years.

Eli Lilly’s stock has seen phenomenal gains of 440% from levels of $160 in early January 2021 to around $860 now, vs. an increase of about 50% for the S&P 500 over this period. Admirably, LLY stock has outperformed the broader market in each of the last 3 years. Returns for the stock were 66% in 2021, 34% in 2022, and 61% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector including UNH, JNJ, and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

There are risks for Eli Lilly, primarily from increasing competition in the obesity drugs market. Apart from Novo Nordisk’s existing drugs, Roche has seen positive data for its early stage clinical trials for its obesity drugs. Amgen is also working on a weight-loss injection. Still, we think Eli Lilly is on a path to deliver strong sales growth in the coming years. The obesity drugs market in particular is expected to rise a whopping 16 times to over $100 billion by 2030, and it will largely be dominated by Eli Lilly and Novo Nordisk. ^[1] While much of these positives are likely priced in, LLY stock may continue to trend higher on the back of market share gains for its drugs and expected regulatory approvals. With the sales and revenues surging over the next few years, it is unlikely that the P/E multiple will shrink in the same proportion. We think any dip in LLY stock should be seen as an investment opportunity for robust gains in the long run.

While LLY stock may see higher levels, it is helpful to see how Eli Lilly peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/25/2024
[2] Cumulative total returns since the end of 2016

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1. Why the anti-obesity drug market could grow to $100 billion by 2030, Goldman Sachs, Oct 30, 2023 [↩]