High-flying aircraft experience turbulence from time to time. It's the same story with stocks. We saw that happen with Eli Lilly(NYSE: LLY) this week.
Lilly announced its third-quarter results on Wednesday. Investors didn't like what they heard. The big pharma stock initially plunged close to 15% after the market opened on Thursday before bouncing back somewhat.
Even with this partial rebound, Lilly's share price remains roughly 13% below the peak set in late August. Some investors could be tempted to sell. I think that's a temptation to avoid. Here's why Eli Lilly is a no-brainer stock to buy on the dip.
Concerns about Lilly's Q3 update are overblown
It's not surprising that Lilly's shares sank after its Q3 update. The drugmaker badly missed Wall Street's revenue and earnings estimates. Lilly cut its full-year earnings guidance. However, a little digging into the rest of the story convinced me that the initial concerns about Lilly's Q3 update are overblown.
Lilly's Q3 revenue and earnings miss primarily stemmed from lower-than-expected sales of Mounjaro and Zepbound. Should investors be worried about weakness in the company's primary growth franchises? Not really.
CFO Lucas Montarce explained in Lilly's Q3 earnings call that wholesalers decreased their inventories of the type 2 diabetes and obesity drugs in Q3. This is only a temporary timing issue, though. Montarce said that the demand for Mounjaro and Zepbound "remains strong and growing." Lilly CEO David Ricks noted that U.S. prescription volume for the drugs jumped 25% from Q2 to Q3.
What about the lower full-year guidance? Lilly cut its adjusted earnings per share forecast from between $16.10 and $16.60 to between $13.02 and $13.52, a reduction of $3.08 per share at the midpoint of the ranges. But that number exactly matches the additional in-process research and development charges the company incurred in Q3 that were primarily related to its acquisition of Morphic Holding. Without this acquisition, Lilly almost certainly wouldn't have changed its guidance.
Lilly's growth story remains intact
I think Lilly's growth story remains intact. It's especially important to remember that Zepbound remains in the early stages of its launch. Ricks mentioned in the Q3 call that Lilly hasn't run a direct-to-consumer advertising campaign for the drug yet, but hinted that one could be on the way. Montarce said that new international launches for Mounjaro should contribute to growth in Q4.
But Mounjaro and Zepbound aren't Lilly's only growth drivers. Sales for breast cancer drug Verzenio jumped 32% year over year to $1.37 billion in Q3. Meanwhile, autoimmune disease drug Taltz continued to enjoy strong momentum, with sales rising 18% to nearly $880 million. Even Lilly's insulin product Humalog, which was first approved by the U.S. Food and Drug Administration (FDA) way back in 1996, delivered year-over-year sales growth of 35%.
The company has two rising stars that could soon boost revenue considerably. The FDA approved Kisunla as a treatment for Alzheimer's disease in July and Ebglyss in treating atopic dermatitis in September. Both Kisunla and Ebglyss hold the potential to become blockbuster drugs.
Investors shouldn't overlook Lilly's pipeline, either. I'm especially keeping my eyes on the company's oral obesity drug orforglipron, which is currently in phase 2 testing. Ricks pointed out that Lilly is in the lead position in developing an oral obesity drug. He noted that oral products are probably the best solution for many of the "potential 1 billion customers on the planet."
Ricks thinks that Lilly could submit orforglipron for approval and launch the drug in less than two years, if clinical studies go well.
The valuation question
Probably the biggest objection to buying Lilly stock is its valuation. The big pharmaceutical company's shares trade at nearly 37.5 times forward earnings. Does this high multiple disqualify Lilly as a no-brainer stock to buy on the dip? Nope.
Investors need to look further into the future than just one year, which is the time frame used for Lilly's forward price-to-earnings ratio. According to LSEG, Lilly's price-to-earnings-to-growth (PEG) ratio based on five-year earnings projections is 0.80. Any PEG ratio of under 1.0 reflects an attractive valuation.
Lilly offers robust growth prospects at a good price, and the stock's recent sell-off presents a great buying opportunity for long-term investors, in my view.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,706!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,529!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $406,486!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of October 28, 2024
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
