Eli Lilly & Co. (LLY): Is It Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Eli Lilly & Co. (NYSE:LLY) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Eli Lilly & Co. (NYSE:LLY)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Eli Lilly & Co. (NYSE:LLY)’s key statistics:

LLY Total Return Price data by YCharts.

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	0.9%	Fail
Improving profit margin	9.2%	Pass
Free cash flow growth > Net income growth	(15%) vs. 10.2%	Fail
Improving EPS	10.1%	Pass
Stock growth (+ 15%) < EPS growth	84% vs. 10.1%	Fail

Source: YCharts. * Period begins at end of Q2 2010.

LLY Return on Equity data by YCharts.

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(27.5%)	Fail
Declining debt to equity	(48.1%)	Pass
Dividend growth > 25%	0%	Fail
Free cash flow payout ratio < 50%	51.3%	Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going
Eli Lilly & Co. (NYSE:LLY) doesn’t look too impressive here, as it’s mustered only three out of nine possible passing grades. The company’s falling free cash flow hurts it in multiple ways, as recent dividend payouts now account for more than half of annualized free cash flow levels. The rush to safety that’s typified gains for many large pharmaceutical stocks is certainly active here as well, since Lilly’s total returns have far outpaced the growth in its bottom line. Investors should hope that Eli Lilly & Co. (NYSE:LLY)’s fundamentals can pull back in line with its share price. Will that happen soon? Let’s dig a bit deeper to find answers.