3 trades on Eli Lilly stock as pharmaceutical investors await Q4 results

LLY, one of the best-performing pharma stocks in 2021, fell more than 6% in the first week of the new year.
Wall Street agrees that innovation in its key therapeutic areas has resulted in higher revenues and earnings per share for Eli Lilly.
Long-term investors should consider buying the dips in Lilly stocks, especially if they fall toward $250 or lower.

Shares of pharmaceutical giant Eli Lilly and Company (NYSE:) have returned nearly 56% in the past year. Yet LLY stock has fallen by more than 6% since the beginning of the year.

On January 7, shares closed the week at $259.50. In comparison, the Jones U.S. Pharmaceuticals Index is up 18.2% in the past 12 months, but lost nearly 2% in the first week of 2022.

On December 16, LLY shares came close to $284 and hit an all-time high. The stock's 52-week range was $161.78 – $283.80 while its market capitalization (cap) stands at $248.2 billion.

Eli Lily focuses on four therapeutic areas: diabetes and obesity, immunology, oncology and neuroscience. It also has antibody treatment against COVID-19, which the US Food and Drug Administration (FDA) has granted Emergency Use Authorization (EUA).

Management released its Q3 figures on October 26. Revenue of $6.78 billion 18% year over year. Excluding revenues from COVID-19 therapies, sales increase over the same period was 11%. On a non-GAAP basis, net income increased 37% year-over-year to $1.764 billion, while adjusted earnings per share increased 38% year-over-year to $1.94. A year ago, comparable stats were $1.29 billion and $1.41.

About the results, CEO David A. Ricks said:

”Lilly delivered another strong performance this quarter. Sales attributable to our newer drugs grew by more than 35% and represented nearly 60% of our core business, an important indicator of our long-term growth potential.”

Meanwhile, the Indianapolis, Indiana-based company said on Dec. 15 that it expected 2021 revenues to be between $28.0 and $28.3 billion and adjusted earnings per share between $8.15 and $8 billion. 8.20 would be. For this year, on the other hand, Lilly expects 2022 revenue to be between $27.8 and 28.3 billion and earnings per share between $8.50 and $8.65.

Before the release of its quarterly results in late October, Lilly shares were trading at around $248. Then, on December 16, it hit a record high of $283.90. But stocks ended the first week of 2022 trading at $259.50. At its current price, the stock has a dividend yield of 1.51%.

What to expect from Eli Lilly

Of the 23 analysts who were polled via Investing.com, the LLY stock has a outperform” rating.

Chart: Investing.com

Analysts also have a median 12-month price target of $283.03 for the stock, representing an increase of about 9% from current levels. The 12 month price range is currently between $202 and $335.

Source: InvestingPro

According to a number of valuation models, such as those that consider P/E or P/S multiples, dividends, or terminal values, the average fair value for LLY stock through InvestingPro is $259.62. In other words, most of the potential good news has probably already been factored into the price of Eli Lilly's stock.

Meanwhile, we can look at the company's financial health as determined by ranking more than 100 factors relative to healthcare peers. In terms of profit and health of price momentum, Eli Lilly scores 4 out of 5 (top score). But growth and cash flow are at 3. Overall performance is rated "great".

Currently, the P/E, P/B and P/S ratios for LLY stocks are 39.4x, 30.3x and 8.5x. By comparison, those stats for the peers stand at 16.6x, 4.7x, and 4.0x. Put another way, Eli Lilly's stock looks foamy compared to the average health care stat.
Pharma stock ratio comparison

We can also look at similar ratios for several other pharmaceutical names through the chart above, such as AbbVie (NYSE:), AstraZeneca (NASDAQ:), GlaxoSmithKline (NYSE:), Merck (NYSE:), Pfizer (NYSE: ) and Sanofi (NASDAQ:).

As these figures show, fundamentals differ significantly across the sector. Therefore, readers looking to invest in individual healthcare names should do more research before hitting the 'buy' button. printing.

Throughout the rest of January, we expect LLY stock to slide towards $250, after which it should trade sideways, possibly between $240 and $260. As a reminder, the company will release its fourth quarter financials on to be announced on Thursday 3 February, before the opening bell. Therefore, volatility could increase in the first week of February as Wall Street processes quarterly stats.

LLY bulls with a two- to three-year horizon that are not concerned about short-term volatility may want to consider capitalizing on the declines. The target would be $283.03, analysts' consensus expectation.

As an alternative, investors may consider buying an exchange traded fund (ETF) that has LLY as a stake. Examples include:

Invesco Dynamic Pharmaceuticals ETF (NYSE:)
ETF for Global X Population Aging (NASDAQ:)
iShares MSCI USA Momentum Factor ETF (NYSE:)
ETC 6 Meridian Hedged Equity Index Option Strategy ETF (NYSE:)

Finally, those who have experience with options strategies and believe that Eli Lilly's stock could fall further may prefer to do a bear put spread.

Most option strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes and not as an actual strategy to be followed by the average retail investor.

Bear Put Spread On LLY Stock Current price: $259.50

In a bear put spread, a trader has both a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. Eli Lilly here) and the same expiration date.

The trader wants the LLY shares to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited.

Here is an example:

For the first leg of this strategy, the trader can buy an at-the-money (ATM) or slightly out-of-the-money (OTM) put option, such as the LLY February 18, 2022, 250-strike put option. This option is currently offered for $6.75. It would cost the trader $675 to own this put option, which expires in just over a month.

For the second part of this strategy, the trader sells a put option, such as the LLY Feb 18, 2022 240 strike put option. The current premium of this option is $3.90. The option seller would receive $390 excluding trading commissions.

Maximum risk

In our example, the maximum risk is equal to the cost of the spread plus commissions. Here is the net cost of the spread is $2.85 ($6.75 – $3.90 = $2.85).

Since each option contract represents 100 shares of the underlying stock, i.e. LLY, we need to multiply $2.85 by 100, which gives us $285 as the maximum risk.

The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, that is, if the Eli Lilly stock price on expiration is higher than the strike price of the long put (or $250, 00 in our example).

Maximum profit potential

In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.

So in our example, the difference between the strike prices is $10.00 ($250.00 – $240.00 = $10.00). And as we saw above, the net cost of the spread is $2.85.

The max profit is therefore $7.15 ($10.00 – $2.85 = $7.15) per share minus commissions. When we multiply $7.15 by 100 stocks, the maximum profit for this option strategy is $715.

The trader will realize this maximum profit if the price of LLY shares is at or below the strike price of the short put (lower strike price) on expiration (or $240.00 in our example).

Investors who have traded options before are likely aware that short put positions are typically assigned at maturity when the stock price is below the strike price (i.e. $240.00 here). However, there is also the option of early placement. Therefore, the position should be monitored until maturity. . At that price, commerce will neither gain nor lose money.

At expiration, the strike price of the long put (i.e. $250.00 in our example) minus the net premium paid (i.e. $2.85 here) would give us the break-even LLY price.

In our example: $250.00 ? $2.85 = $247.15 (minus commissions).

Bottom Line

Long-term shareholders of Eli Lilly have achieved excellent returns in recent years. Wall Street attributes innovation in its key therapeutic areas to the group's success.

LLY shares, however, started off on a downside note in 2022. We may be able to expect volatility in the stock price to continue for several more weeks as the company prepares to report its fourth quarter results. Later in the year, however, Eli Lilly's stock should start another leg higher.

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