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SUMMARY
Parkev Tatevosian, CFA, presents a detailed discounted cash flow valuation of Eli Lilly, highlighting the company's innovation in weight loss treatments and its robust financial outlook. The analysis concludes that Eli Lilly is currently undervalued, with a calculated intrinsic value per share exceeding the market price.
MAIN POINTS
- Eli Lilly's stock performance is driven by its successful weight loss treatments, prompting an analysis of its fair value using a proprietary discounted cash flow model.
- Forecasts project Eli Lilly's free cash flow to rise from $21 billion in 2026 to $99 billion by 2035, reflecting confidence in the company's ongoing innovation.
- A discount rate of 7.97% is applied, reflecting the company's low correlation with macroeconomic cycles and relatively low risk profile.
- The discounted cash flow method is contrasted with other valuation approaches, emphasizing its suitability for assets with predictable cash flows.
- The calculated intrinsic value of Eli Lilly is $1,356 per share, significantly above the current market price of $1,041, indicating the stock is undervalued.
- Eli Lilly remains rated as a buy based on updated calculations, though it was not included in this year's top stocks list.
DETAILED ANALYSIS
Eli Lilly's recent surge in stock performance is attributed to its innovative weight loss treatments, which are rapidly gaining market share and driving investor interest. The company's valuation is assessed using a customized discounted cash flow (DCF) model, a standard approach in finance for determining the present value of future cash flows. The analysis projects Eli Lilly's free cash flow to increase substantially over the next decade, from $21 billion in 2026 to $99 billion by 2035.
This optimistic outlook is based on the company's proven ability to innovate and develop new treatments that generate significant revenue and profit, providing confidence that future product cycles will continue to fuel growth.
The DCF model incorporates a discount rate of 7.97%, which is relatively low for the sector due to the healthcare and pharmaceutical industry's resilience against macroeconomic fluctuations. The company's after-tax cost of debt is estimated at 6.75%, and the cost of equity at 8.11%, with a beta of 0.585 indicating lower volatility compared to the broader market. The risk-free rate used in the capital asset pricing model is 4.6%, with a market risk premium of 6%.
These inputs reflect Eli Lilly's stable risk profile and the defensive nature of its business.
The analysis distinguishes the DCF method from other valuation techniques, noting its appropriateness for businesses with predictable cash flows, unlike assets such as gold or cryptocurrencies. By discounting both projected cash flows and terminal value, the total value of operations is calculated at over $1.3 trillion. After adjusting for non-operating assets and debt, the equity value is $1.277 trillion, translating to an intrinsic value per share of $1,356.
This figure is notably higher than the current market price of $1,041, supporting the conclusion that Eli Lilly is undervalued. The stock remains rated as a buy, consistent with previous assessments, though it was not included in the current year's top picks.
LINKS
- Special offer for The Motley Fool Stock Advisor
- Parkev Tatevosian's book on stock evaluation
- Fiscal.ai investment research platform with discount
- Webull investing platform with bonus shares offer
- Subscribe to Parkev Tatevosian's Substack newsletter