Eli Lilly & Co. Quarterly Valuation – July 2014 $LLY

LLY_red_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor Near 52 Week Lows.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Eli Lilly & Co. (LLY) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Eli Lilly and Company, discovers, develops, manufactures, and sells products, in one business segment, pharmaceutical products. The Company also has an animal health business segment. It manufactures and distributes its products through facilities in the United States, Puerto Rico, and 15 other countries. Its products are sold in approximately 130 countries. The Company’s products include neuroscience products, endocrinology products, oncology products, cardiovascular products, animal health products and other pharmaceuticals. The Company’s new molecular entities (NMEs) are in Phase III clinical trial testing include Dulaglutide, Edivoxetine, Empagliflozin-BI10773, Enzastaurin, Ixekizumab, Necitumumab,, New insulin glargine product, Novel basal insulin analog, Pomaglumetad Methionil, Ramucirumab, Solanezumab and Tabalumab. In July 2014, Anthera Pharmaceuticals Inc acquired Sollpura (liprotamase), a investigational Pancreatic Enzyme Replacement Therapy (PERT) from Eli Lilly and Company.
LLY Chart

LLY data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $62.81
MG Value $66.84
MG Opinion Fairly Valued
Value Based on 3% Growth $52.58
Value Based on 0% Growth $30.82
Market Implied Growth Rate 4.41%
Net Current Asset Value (NCAV) -$3.02
PEmg 17.32
Current Ratio 1.97
PB Ratio 3.83

Balance Sheet – 3/31/2014

Current Assets $13,039,300,000
Current Liabilities $6,631,700,000
Total Debt $5,255,300,000
Total Assets $34,756,900,000
Intangible Assets $4,203,100,000
Total Liabilities $16,418,800,000
Outstanding Shares 1,119,450,000

Earnings Per Share

2014 (estimate) $2.75
2013 $4.32
2012 $3.66
2011 $3.90
2010 $4.58
2009 $3.94
2008 -$1.89
2007 $2.71
2006 $2.45
2005 $1.83
2004 $1.66

Earnings Per Share – ModernGraham

2014 (estimate) $3.63
2013 $4.07
2012 $3.58
2011 $3.24
2010 $2.72
2009 $1.80

Dividend History
LLY Dividend Chart

LLY Dividend data by YCharts


Eli Lilly & Company is suitable for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio, lack of stable earnings over the last ten years, and high PB ratio.  However, the company passes all of the Enterprising Investor’s requirements and the investor type thus has no significant initial concerns. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities such as through ModernGraham’s valuation of Bristol-Myers Squibb (BMY) and ModernGraham’s valuation of Pfizer Inc. (PFE).  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.72 in 2010 to an estimated $3.63 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 4.41% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Eli Lilly & Company (LLY)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Eli Lilly & Company (LLY) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia or the company website for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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