Eli Lilly & Co. Annual Valuation – 2015 $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 Most Undervalued Companies for the Defensive Investor – April 2015.  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 two business segments human pharmaceutical products and animal health products. The Company manufactures and distributes its products through facilities in the United States, Puerto Rico and 11 other countries. Its animal health business, operating through its Elanco division, develops, manufactures, and markets products for both food animals and companion animals. The Company’s products are Humulin, Jentadueto, Axiron, Cymbalta, Strattera, Amyvid, Gemzar, Erbitux, Effient, ReoPro, Posilac, Posilac and Surmax. Its products in Late-Stage are Dulaglutide, Empagliflozin, Ramucirumab, Evacetrapib, Necitumumab, Tanezumab, Edivoxetine, Liprotamase and Ramucirumab.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  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 - FAIL
  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 = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  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 - FAIL

Valuation Summary

Key Data:

Recent Price $73.71
MG Value $27.47
MG Opinion Overvalued
Value Based on 3% Growth $46.93
Value Based on 0% Growth $27.51
Market Implied Growth Rate 7.14%
Net Current Asset Value (NCAV) -$8.43
PEmg 22.77
Current Ratio 1.41
PB Ratio 5.27

Balance Sheet – March 2015

Current Assets $11,743,000,000
Current Liabilities $8,343,000,000
Total Debt $7,415,000,000
Total Assets $35,654,000,000
Intangible Assets $8,895,000,000
Total Liabilities $20,734,000,000
Outstanding Shares 1,067,000,000

Earnings Per Share

2015 (estimate) $3.09
2014 $2.23
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 $1.81

Earnings Per Share – ModernGraham

2015 (estimate) $3.24
2014 $3.45
2013 $4.07
2012 $3.58
2011 $3.24
2010 $2.72

Dividend History


Eli Lilly & Co. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, and the poor PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the current assets and the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) not grow at all from $3.24 in 2011 to the estimated $3.24 for 2015.  This level of growth does not support the market’s implied estimate of 7.14% annual growth over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below 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 & Co. (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 any 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 for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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