Leeb: A Lot to Like at Lilly

01/17/2003 12:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

"Pharmaceutical stocks will benefit from political factors," says Stephen Leeb, editor of Personal Finance. "The Republican administration and Congress are friendly to the group. As a result, drug companies will likely avoid sharp price caps on drugs for seniors, FDA approvals will likely come faster, and steps to promote generics will be relatively tame." Here's Leeb's favorite in the group.

"We are adding Eli Lilly (LLY NYSE) to our Foundation Holdings, which represents our top buys for growth-oriented investors seeking long-term capital appreciation. In 2003-2004, Lilly is slated to introduce eight products, whose combined revenue potential will approximate $10 billion a year by 2008. This compares with the company’s current revenue base of $11 billion. Moreover, no major products are coming off patent in the next several years. This unmatched pipeline points to growth of 15% (perhaps more) over the next five years. Though the stock is expensive based on expected 2003 earnings, it becomes ever cheaper as earnings begin to accelerate in 2004 and beyond. Meanwhile, don’t be deceived by Lilly’s relative low free cash flow yield. It’s the result of a very slow period, and 2003 will mark the trough. Beyond 2003, we believe that Lilly will be the fastest growing pharmaceutical in the world, by a fairly wide margin.

"Lilly has the most upside within this group. Lilly, whose franchise in the neuro-psychological arena is unmatched, is positioned for torrid growth. The period ahead could easily match the 1994-2000 period, during which earnings grew by more than 15% a year and the stock advanced more than eightfold. Admittedly, this time the valuation is higher than in 1994, but the potential valuation boost of the elimination of double dividend taxation wasn’t present in 1994. Indeed, because they are high free cash flow generators, drug companies are among the clearest winners from the potential elimination of double taxation on dividends. These factors will boost the p/e of major pharmaceuticals and assure their strong relative performance over the next two years. The bottom line is that Eli Lilly should be a blue chip leader over the next five years. Buy up to 70 for a two year target of 100."

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