We think that Eli Lilly stock (NYSE: LLY) currently is a better pick compared to Abbott Labs stock (NYSE: ABT) with similar market capitalization in the healthcare sector, despite Eli Lilly being the more expensive of the two. LLY stock trades at about 9.5x trailing revenues, compared to 5.5x for ABT stock. Although both the companies saw a rise in revenue over the last year or so, with Covid-19 testing driving Abbott’s sales and market share gains for some of Eli Lilly’s drugs, including diabetes drug Trulicity, as well as its Covid-19 treatment, aiding its top-line expansion. ABT stock has been weighed down over the recent months owing to the rising vaccination rate, and subsequent decline anticipated for its Covid-19 related business.
For perspective, ABT stock is up just 10% over the last six months, underperforming the broader indices, with the S&P500 rising 12% over the same period. This compares with a 32% rise for LLY stock, partly aided by hopes for regulatory approval for its Alzheimer’s treatment – Donanemab – which, if approved, will be a multi-billion dollar opportunity for Eli Lilly. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Abbott vs Eli Lilly: Similar Market Cap; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Abbott’s Revenue Growth Has Been Stronger
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Now, Abbott’s revenue grew at a faster pace of 28% compared to 16% for Eli Lilly during the last twelve month period, primarily driven by a very high demand for Covid-19 testing. If we were to look at the last three years, Abbott’s revenue grew at a CAGR of 8% slightly above the CAGR of 7% for Eli Lilly. Abbott’s revenue is expected to rise 22% in 2021, but decline in mid-single-digits next year, as the demand for Covid-19 testing declines gradually. However, Abbott’s other businesses, including Medical Devices, should pick up pace with economies opening up gradually. Our Abbott Revenue Comparison dashboard provides more insight on the company’s revenues and its comparison to that of its peers. Eli Lilly’s revenue is expected to rise 11% in 2021 and rise in low single-digits next year, aided by continued market share gains for drugs, such as Trulicty, Verzenio, Olumiant, and Bamlanivima, as well as its Covid-19 treatment. The company recently announced that it will supply another 614,000 doses of its Covid-19 cocktail (a combination of bamlanivimab and etesevimab) to the U.S. government for a total of $1.3 billion, bolstering its top-line growth over the coming quarters.
2. Eli Lilly Has Seen Better Margin Growth
Looking at profitability, unlike the trend seen in revenue growth, Eli Lilly’s operating margin of 21.6% over the last twelve month period is better than the 18.5% for Abbott. Even if we were to look at last three year average operating margin, Eli Lilly’s 20.8% figure is much better than 13.6% for Abbott. Eli Lilly’s operating margin of 21.6% over the last twelve month period compares with 21.8% in 2019, before the pandemic. The current operating margin of 18.5% for Abbott is lower compared to Eli Lilly, but it is better compared to the 14.0% figure in 2019. We expect margins for both companies to face some headwinds in the near term, given the inflationary pressure and supply chain constraints.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for Covid-19 testing is likely to slow going forward (compared to the surge seen over the last year or so), impacting the revenue growth for Abbott. However, with economic growth the demand for pharmaceuticals, as well as medical devices, is likely to rise.
Abbott’s current valuation is seemingly more attractive than that of Eli Lilly, with ABT stock trading at about 5.5x trailing revenues, versus 9.5x for LLY stock, and Abbott has also seen better revenue growth. However, Eli Lilly is much more profitable, partly explaining the difference in valuation of the two companies. Even if we were to look at financial risk, while Abbott’s 12% cash as percentage of assets is higher than 7% for Eli Lilly, Abbott’s 8% debt as a percentage of its equity is higher than the 7% figure for Eli Lilly, implying that Eli Lilly has a better debt position, while Abbott has a better cash cushion. This means that LLY stock does not appear to be at a higher financial risk compared to ABT stock.
Overall, with superior margins for Eli Lilly, and vast potential for Donanemab, with its peak sales estimated to top $10 billion (if approved), we think this gap in valuation between ABT and LLY is justified and LLY may continue to outperform ABT stock, going forward. In fact, going by our Abbott Valuation of $140 per share, there is an upside potential of only 9% from the current levels of around $128. On the other hand, if Donanemab is approved, LLY stock can see much higher levels from its current price of $258. That said, investors should weigh in the fact that Donanemab is not yet approved by any regulator. Eli Lilly has recently begun the process to get regulatory approval for its Alzheimer’s treatment. While its late stage clinical study data will be available only in 2023, the FDA will consider the accelerated approval application sometime in 2022.
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