Eli Lilly & Co.’s valuation multiples
Headquartered in Indianapolis, Indiana, Eli Lilly & Co. (LLY) has two main businesses: Human Pharmaceuticals and Animal Health.
From an investor’s point of view, the two best valuation multiples used for valuing companies like Eli Lilly are forward PE (price-to-earnings) and EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiples, considering the relatively stable and visible nature of their earnings.
PE multiples represent what one share can buy for an equity investor. On April 26, 2017, the company was trading at a forward PE multiple of ~19.3x, compared to the industry average of ~15.9x.
Over the last year, Eli Lilly’s (LLY) forward PE has traded in the range of 18.9x–25.5x. Among its competitors, Pfizer (PFE), Johnson & Johnson (JNJ), and Merck & Co. (MRK) have forward PE multiples of 13.0x, 16.9x, and 16.0x, respectively.
Based on the last five-year multiple range, Eli Lilly’s current valuation is neither high nor low, and its PE multiple has ranged from ~7.6x to ~26.5x.
On a capital structure–neutral and excess cash-adjusted basis, Eli Lilly currently trades at ~13.9x, which is higher than the industry’s average of ~10.8x. Among its competitors, Pfizer (PFE), Johnson & Johnson (JNJ), and Merck & Co. (MRK) have forward EV-to-EBITDA multiples of 10.1x, 11.5x, and 9.5x, respectively.
Eli Lilly’s stock price has increased ~6.1% over the last 12 months. Analysts estimate that the stock has the potential to return ~10.1% over the next 12 months. Analysts’ recommendations show a 12-month target price of $89.10 per share compared to its price of $80.96 per share on April 27, 2016. The consensus rating for Eli Lilly stock is ~2.0, which shows a moderate buy for long-term investors.
For broad-based exposure to the company, investors can consider the Fidelity MSCI Healthcare ETF (FHLC), which holds ~2.2% of its total assets in Eli Lilly.