Most of the market focuses on the technology sector, with names like Nvidia Co. (NASDAQ: NVDA) receiving the lion’s share. Among this hype and excitement, those companies worthy of investor capital have been left behind, particularly those in the ‘defensive’ space, such as the healthcare sector.
Those savvy enough to decrypt the market’s message will notice that the healthcare industry is now setting up for a potential breakout, aided by the confusing language coming from the Federal Reserve (the Fed), not setting a definite and concrete timeline for when (or even if) interest rates will be cut at all this year.
One stock becoming the product of market preference and analyst bullish sentiment is Eli Lilly and Co. (NYSE: LLY), especially now that it is looking to tackle one of America’s silent killers through its new exposure to GLP-1 weight loss medications. Here’s why investors should watch this stock and its attempts to keep making new all-time highs.
Eli Lilly Stock Price Action: What's Driving the Movement?
Bullish momentum is the result, but why is the market willing to reward Eli Lilly stockholders with a market-beating run of nearly 100% in the past 12 months? Starting at the bottom, it can be due to the central problem the company is trying to solve.
As of 2024, approximately 40% of Americans suffered from obesity, according to the Centers for Disease Control and Prevention (CDC). As obesity is often related to diabetes, 11.6% of Americans are affected by diabetes following the same reports, and Eli Lilly’s research and development (R&D) department took notice.
Seeing positive success in its Zepbound product for the first quarter of 2024, with $517.4 million in revenues, inspired the company to develop more obesity solutions. But Eli Lilly isn’t alone in trying to provide affordable—and, more importantly, safe—weight loss solutions.
Shares of Hims & Hers Health Inc. (NYSE: HIMS) have tripled this year, as the market has seen stratospheric growth in that company’s attempt to provide weight loss solutions as well, but there’s one major problem. Eli Lilly has the track record and institutional backing that Hims & Hers simply doesn’t have yet, so markets chose Eli Lilly stock instead.
Returning to R&D within Eli Lilly, a new product just reached phase 3 clinical trials to broaden the company’s weight loss product portfolio. SURMOUNT-OSA is a new potential drug that could bring an additional half a billion in revenues for Eli Lilly stock once it is approved for commercial distribution.
Because of this, a few on Wall Street chose to get behind Eli Lilly before the next rally.
Why Analysts and Institutions are Bullish on Eli Lilly Stock
Momentum aside, other fundamental factors are backing the bullish thesis behind Eli Lilly stock. Over the past month, the healthcare industry has gone into a hiring spree to show that the coming months could show increased business activity and, thus, rising corporate profits.
According to May’s employment situation report (NFP), the U.S. economy added 272,000 jobs during the month. The healthcare industry took down 68,300 employees, or roughly 25.1%.
Those at Bank of America felt comfortable enough to slap a $1,000 price target on Eli Lilly stock, daring it to rally by as much as 12.2% from its current level despite being near a new all-time high.
More than that, Janus Henderson, Eli Lilly’s largest shareholder, decided to boost its already sizeable stake in the stock in the past quarter. A 7.3% boost as of May 2024 brought the asset manager’s position up to $2.8 billion today.
Unlike other large capitalization pharma companies, Eli Lilly's stock stands out in several metrics, particularly valuation. These analysts expect to see earnings per share (EPS) growth of 40.1% in the next 12 months, justifying a premium.
Markets now value these future earnings at a forward P/E ratio of 46.3x today, commanding a 175% premium over AstraZeneca (NASDAQ: AZN) and that stock’s 16.8x forward P/E ratio. Here’s how investors can take that trend one step broader.
On a price-to-book (P/B) ratio basis, Eli Lilly stock trades at a massive 77.9x, stratospherically higher than the medical sector’s average 4.8x multiple today.
There’s always a good reason for markets to push stocks near their 52-week highs. Investors can now point to new drug approvals and EPS growth as reasons for Eli Lilly's valuation premiums.
