If you’re investing in a stock with a high valuation, you know that expectations will be high when it comes time for the company to report earnings. Any misses compared to analyst estimates or disappointing guidance can quickly lead to a sell-off, analyst downgrades, and a very different outlook for the stock as a whole.
health giant Eli Lilly (NYSE: LLY) has been trading at an inflated valuation for some time thanks to enthusiasm around its diabetes and weight loss treatments, Mounjaro and Zepbound. Unfortunately, for the company’s shareholders, it fell short of expectations in its most recent earnings report on October 30. And the numbers weren’t even close.
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Is the stock in trouble??
Eli Lilly didn’t have a bad quarter, but when perfection is factored into a stock’s price, any less than glorious results can end up weighing on its valuation. And although the company’s revenue rose 20% to $11.4 billion in the third quarter ended Sept. 30, that fell short of analyst expectations of $12.1 billion. In short, adjusted earnings per share (EPS) of $1.18 were also nowhere near the earnings per share (EPS) of $1.47 that Wall Street was looking for.
The company’s numbers would have been better, but a big problem for the pharmaceutical company these days is inventory levels. Demand is strong, but Eli Lilly says that since it was fulfilling backorders to wholesalers for Mounjaro and Zepbound, they didn’t end up asking for more supply and simply used their existing stock. That could lead to shortages again next quarter if wholesalers don’t have enough supply on hand.
Another problem for investors is that Eli Lilly adjusted its guidance for the year and now projects that its adjusted earnings per share will fall within a range of $13.02 and $13.52 (the previous forecast was $16.10 to $16.60). This change reflects acquisition-related charges the company has recently incurred, but the decrease was disappointing to investors.
Before the earnings, Eli Lilly shares were trading around $900. By Monday, the stock had dropped to around $800, dropping more than 10% of its value in just a few days after the release of its earnings numbers.
Any kind of setback could weigh on healthcare stocks, which previously traded at more than 100 times trailing earnings. It’s still not even a terribly cheap buy when you look at its forward price-earnings multiple of 36, which is based on analysts’ expectations for next year’s earnings. When a stock is trading at such a high premium, expectations are high.