With Improved Guidance, Eli Lilly and Company (NYSE:LLY) Appears to be Trading at the Right Price

By
Richard Bowman
Published
December 16, 2021
NYSE:LLY
Source: Shutterstock

On Wednesday, Eli Lilly and Company (NYSE:LLY) raised guidance for 2021’s full year results as well as for 2022. The stock price has now rinse 12% to mark a new all time high at $283.90. The company’s fourth quarter ends on 31st December and results will be announced in early February.

Updated guidance for FY2021:

  • Full year revenue is expected to be between $28 and $28.3 bln, compared to the previous consensus of $27.6. This will reflect revenue growth of 10 to 11%. 
  • GAAP EPS $6.18 to $6.23 compared to $6.79 in 2020
  • Non-GAAP EPS $8.15 to $8.20 (compared to the previous range of $7.95 to $8.05) and 2.5% higher for the year.

Updated guidance for 2022:

  • Full year 2022 revenue is now expected to be between $27.8  and $28.3 bln. This means sales are expected to be flat in 2022. 
  • GAAP EPS $8.50 and $8.65 vs consensus of $8.21 and up 38% from the current year.
  • Non GAAP EPS $8.00 to $8.15, slightly lower than the current year.
  • In 2022 the operating margin is expected to improve from 24 to 30%, which will result in the increase in EPS.

The company also gave several business updates. Revenue growth is expected to be driven by volume growth from key products including Trulicity, Verzenio, Taltz, Jardiance, Cyramza, Emgality, Tyvyt, Retevmo and Olumiant. The company also stated that it is on track to launch 20 new medicines between 2014 and 2023.

Is expected growth already in the price?

The new guidance will probably result in slight increases in consensus estimates. But, are the estimates enough to justify the current valuation?

Eli Lilly’s price-to-earnings (or "P/E") ratio of 37.9x is roughly twice that of the average US Listed company. This implies that investors are expecting more growth from EliLilly than the market.

View our latest analysis for Eli Lilly

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NYSE:LLY Price Based on Past Earnings December 15th 2021

Does Growth Match The High P/E?

Looking ahead now, EPS is anticipated to climb by 19% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive. The new guidance suggests GAAP EPS will catch up with non-GAAP EPS in 2022. This will result in EPS growth of 38%, primarily driven by margin improvements.

The Bottom Line On Eli Lilly's P/E

Eli Lilly’s P/E ratio looks about right based on the current growth outlook. EPS growth over the next year will be slightly better than the five year average, but then slow  down in the following year. Meanwhile, revenue will probably be flat next year and then increase slightly. Beyond that, growth will depend on sales in the current portfolio and from new products.

This ties in with our estimates of the stock’s fair value which is $372. This implies that the company is trading at a modest 26% discount, but is no longer cheap after rising nearly 70% year to date. While the stock doesn't appear overvalued, expectations for growth beyond 2022 may need to rise for the stock price to match the performance of tha last year.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Eli Lilly, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Eli Lilly, explore our interactive list of high quality stocks to get an idea of what else is out there.

Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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