An update on Eli Lilly and the incredible weight-loss drugs

Today, let's follow up on a request I put out to readers yesterday...

In yesterday's e-mail, I highlighted 10 stocks that have done exceptionally well over time because the underlying companies have consistently generated greater than 20% returns on capital.

I also invited my readers to weigh in on which I should take a closer look at. And I received the most requests for drug giant Eli Lilly (LLY).

It's the maker of the leading weight-loss drug, tirzepatide, which it sells under two brand names: Mounjaro, for treating Type 2 diabetes, and Zepbound, for weight loss and weight management.

Longtime readers will recall that I've discussed Lilly previously over the years. I most recently wrote about the company in my February 26 e-mail, in which I talked about the incredible weight-loss drugs more broadly. As I said about them back then:

I remain convinced that they're game changers that are quickly improving the quality of life for millions of Americans – and tens of millions more would also benefit.

Roughly 42% of adult Americans are obese (about 9% severely so) and another roughly 31% are overweight. Put simply, it's a crisis that's severely affecting the health and quality of life of nearly three-fourths of Americans.

These new drugs are having impacts that are nothing short of miraculous. More than a dozen of my good friends are on them – one of whom has lost more than 100 pounds and is a new man.

The news around the weight-loss drugs continues to be astounding, as this recent Wall Street Journal article summarizes: Should Everyone Be Taking Ozempic? Doctors Say More People Could Benefit. Excerpt:

Now, Ozempic and others in the "GLP-1" category of drugs are approaching [a] critical mass. They are showing promise for an ever-expanding list of diseases, beyond today's most common uses of weight loss and treating diabetes. Heart, kidney and liver diseases. Sleep apnea. Arthritis. Alzheimer's disease. Alcohol addiction. Even aging. Some of these are potential benefits that need further study.

"It is getting to the point of wondering what GLP-1 agonists aren't good for," pharmaceutical researcher and blogger Derek Lowe wrote in the academic journal Science last year.

If this trajectory continues, doctors say millions more people would benefit from them – maybe even one-third to a majority of adults.

And it's not just obese folks who are taking a weight-loss drug...

My friend Suzy Weiss wrote an essay in The Free Press last month about why she's taking one: I Don't Need Ozempic. But I Want It. Excerpt: 

"The side effects are different for everyone, but for me," I say, "I'm prettier, happier, more confident, my clothes look better, and more men take notice of me."

I was never obese, or approaching it. I didn't have diabetes, or prediabetes...

I was looking for a shortcut, and I got it.

And as Suzy continued in her essay, she knows she isn't the only one in this situation:

Friends are passing around the names of sympathetic doctors who are based in Miami but do virtual appointments. Med spas are popping up, offering to dispense the drugs along with fillers, Botox, and microneedling procedures. There are websites where you can order the materials to make your own Ozempic at home, and compounding pharmacies that will make it for you with generics at a fraction of the cost. We're in a Wild West moment when it comes to weight-loss drugs.

But imagine a world where you will be able to tell your doctor "I'd like to stay at the weight I was at my wedding," or "I'm feeling a little frail lately, let's go up to 135," and your dose is adjusted accordingly. Weight will be something we set and forget. Like a thermostat for your body. And you won't even have to bother with the refrigerated injections. We're about to live in that world.

Suzy's essay underscores how mind-bogglingly large the market is for this class of drugs.

So with that extra bit of context, let's look at Lilly's stock...

In my February 26 e-mail, I shared my sad story of failing to recommend LLY shares when I first wrote about these drugs in September 2022 because the stock appeared to be too expensive – and then I watched it triple. I shared the important lesson I learned:

It's frustrating to have correctly identified an obvious, huge, long-term trend and the company best poised to benefit from it – but then to have gotten scared off because of short-term valuation metrics.

As I've written countless times, the key to long-term investment success is being clever or lucky enough to have a couple of big winners in a portfolio of 10 to 20 stocks – generally market leaders riding big waves – and then holding them for years (or even decades).

I also listed some examples:

Think Costco Wholesale (COST) with warehouse clubs, Netflix (NFLX) with streaming videos, Meta Platforms (META) with social media, Visa (V) with credit cards, Apple (AAPL) with smartphones, Walmart (WMT) with supercenters, Nvidia (NVDA) with AI, or McDonald's (MCD) with fast food.

Lilly was a clear example... but I was too much of an old-school value investor to pay a nosebleed price for it!

Might we be seeing another opportunity today? Well, let's take a look at the stock at current levels – starting with my usual "first look" style of analysis...

LLY shares closed at $915.01 on February 26. Since then, they have fallen about 16% to close yesterday at $765.84.

In the five-year stock chart below, you can see the long-term move higher and recent pullback:

Turning to Lilly's latest financials, we can see that the company's revenue has roughly doubled and operating income has nearly tripled since tirzepatide took off:

Interestingly, the cash-flow statement is all over the place. But some of this – rising inventories and capital expenditures ("capex") reflect Lilly ramping up production to meet surging demand.

Here's a chart of the company's operating cash flow, capex, and free cash flow ("FCF") by quarter over the past few years:

Lastly, let's turn to valuation...

As of yesterday's closing price, Lilly trades at roughly 14.7 times trailing revenue, 32.5 times trailing enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), and 62.3 times trailing earnings.

Those are high numbers... But I wouldn't want to repeat the same mistake I made three years ago.

Stocks aren't valued based on the underlying company's historical performance, but rather future performance.

Analysts expect Lilly to earn $21.79 per share this year, $29.64 next year (up 36%), $36.57 (up 23%) in 2027, and $42.44 (up 16%) in 2028.

That means Lilly is trading at about 35 times this year's expected earnings and 25.8 times, 20.9 times, and 18 times the subsequent three years' earnings estimates, respectively.

Those are much more reasonable multiples. But some key things need to go right – primarily the demand for weight-loss drugs continuing to explode, Lilly maintaining its leadership position (which appears likely, as it plans to launch a pill form of tirzepatide), and the company executing superbly.

I think all these things are likely to happen and thus Lilly will be a long-term winner – both the company and the stock. So if you're fortunate enough to own it, hold on!

Meanwhile, if my team and I at Stansberry's Investment Advisory decide that Lilly looks compelling enough to add to the model portfolio, our subscribers will be the first to know – as always. (Subscribers can also see the full portfolio of existing open recommendations right here.)

If you aren't an Investment Advisory subscriber, you can find out how to become one – plus gain instant access to the full portfolio and put yourself on the list to receive our next monthly issue, which publishes after the close tomorrow – right here.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

P.P.S. For readers interested in following my run to become New York City's next mayor, here's a quick update...

The primary is in 19 days on June 24. While I remain very much a dark horse, I qualified for the two televised debates – the first of which took place last night (the second is a week from today).

I was really pleased with how it went. You can watch the full two hours here and clips of the nine minutes of speaking time I got here. Here's a picture from a New York Post article about the debate: