Can Eli Lilly See Rising Prices?

With shares of Eli Lilly (NYSE:LLY) trading around $53, is LLY an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Eli Lilly discovers, develops, manufactures, and sells 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, and sells its products in approximately 130 countries. Eli Lilly’s offerings include neuroscience products, endocrinology products, oncology products, cardiovascular products, animal health products, and other pharmaceuticals.

Eli Lilly is set to defend the patent on its lung cancer drug Alimta, which accounted for 11 percent of the company’s revenue in 2012. The patent in question covers the practice of administering the drug along with certain vitamins to help prevent side effects. If the company wins the right to keep the patent, generic drug makers won’t be able to make a generic version until 2022. Eli Lilly will lose the patent to its No. 1 drug, the antidepressant Cymbalta, later this year, so keeping the Alimta patent would be a victory for the company.

T = Technicals on the Stock Chart Are Mixed

Eli Lilly stock has been steadily rising in the past several years. The stock is now pulling back from this year’s highs, so it may need a little time before moving higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Eli Lilly is trading between its key averages, which signals neutral price action in the near term.

LLY

Source: Thinkorswim

Taking a look at the implied volatility and implied volatility skew levels of Eli Lilly options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Eli Lilly Options

23.54%

56%

55%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Steep

Average

October Options

Steep

Average

As of Monday, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Eli Lilly’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Eli Lilly look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

33.73%

56.04%

-4.23%

6.31%

Revenue Growth (Y-O-Y)

5.87%

0.00%

-1.48%

-11.46%

Earnings Reaction

3.05%

-3.90%

3.19%

-2.71%

Eli Lilly has seen rising earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings with Eli Lilly’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Eli Lilly stock done relative to its peers – Bristol-Myers (NYSE:BMY), Pfizer (NYSE:PFE), and GlaxoSmithKline (NYSE:GSK) — and sector?

Eli Lilly

Bristol-Myers

Pfizer

GlaxoSmithKline

Sector

Year-to-Date Return

7.44%

28.97%

13.24%

18.70%

15.46%

Eli Lilly has been a relatively poor performer, year to date.

Conclusion

Eli Lilly is engaged in the discovery, development, manufacture, and sales of pharmaceutical products around the world. The company is currently trying to defend a patent for one of its drugs that accounts for 11 percent of its revenue. The stock has been steadily rising over the last few years but is now pulling back a bit. Over the last four quarters, earnings have been rising while revenue figures have been mixed, which has led to mixed feelings among investors in the company. Relative to its peers and sector, Eli Lilly has been a weak year-to-date performer. WAIT AND SEE what Eli Lilly does this coming quarter.

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