Post-Earnings Dip: Why This Beaten-Down Stock Is a No-Brainer Buy

There is plenty of movement in equity markets during earnings season, but from a fundamental standpoint, investment theses seldom change. That's why significant price drops in shares of quality businesses can be excellent buying opportunities.

That brings us to Eli Lilly (NYSE: LLY), a leading pharmaceutical company that released its quarterly update on May 1. The market was not impressed, leading to a decline of nearly 12% in the drugmaker's share price post-earnings. Yet, this shouldn't deter long-term investors. Here's why the stock still looks attractive.

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When blow-out results are not enough

Eli Lilly continues to deliver results that would make any megacap pharmaceutical company incredibly proud. Revenue in the first quarter grew by 45% year over year to $12.7 billion. Divide that top-line growth by three, and the drugmaker would still be performing better on this front than most of its similarly sized peers. Its diabetes and obesity management medications did most of the heavy lifting, but older products, like cancer drug Verzenio, continue to perform well. Adjusted earnings per share (EPS) were up 29% year over year to $3.34.

Image source: Getty Images.

However, Lilly's guidance disappointed investors. The company now expects its EPS for the year to be in the range of $20.17 to $21.67, down from the $22.05 to $23.55 it had previously projected. It blamed the change on acquired "in-process research and development" (IPR&D) charges, and net losses on security investments. But it also reaffirmed its revenue guidance of $58 billion to $61 billion.

Those projections include the impact of tariffs as of May 1, but since that situation might change, there's some uncertainty. Despite the factors that led to its post-earnings decline, Eli Lilly remains an excellent stock for long-term investors.

Keep calm and hold steady

Some investors may worry about Lilly's lower-than-expected bottom line for the fiscal year 2025. The company's shares look expensive, with a forward price-to-earnings ratio topping 37; for comparison, the average for the healthcare industry is around 17 at this writing. At these levels, the market wants to see flawless performances and projections from a company. Anything short of that is likely to lead to a sell-off, which is what happened here.

However, one crucial factor for long-term investors is whether recent developments change the company's thesis much. In this case, the answer is a resounding no. Lilly's IPR&D charges, which will lead to a less impressive bottom line this fiscal year, come from an acquisition; that's not something the company will have to deal with constantly. And while the threat of tariffs remains, Lilly has the means to overcome that problem in the medium term. The company has 10 ongoing projects, which, on completion, will allow it to manufacture drugs for U.S. patients entirely within the country.

Some might argue that the post-earnings dip was justified, considering the sky-high expectations for Eli Lilly. Regardless, given that it can get around its most significant headwind, this does represent a buying opportunity, especially when looking at the rest of its business. Lilly might be pulling ahead of its long-term rival, Novo Nordisk, in the fast-growing weight management market. Zepbound generated $2.3 billion in sales during the first quarter, after racking up just $517.4 million in the comparable period of the previous fiscal year.

Furthermore, recent clinical progress looks incredibly promising. Lilly's orforglipron, an oral GLP-1 candidate, knocked it out of the park in phase 3 studies. This medicine should be yet another major growth driver in diabetes and obesity management, since the leading drugs in this space are currently administered subcutaneously. That's to say nothing of newer drugs, like Alzheimer's disease medicine Kisunla and eczema treatment Ebglyss, that will eventually impact the company's financial results. The pipeline in weight management remains attractive, and Lilly is making excellent strides in other therapeutic areas too.

Eli Lilly's business still looks rock solid, its prospects attractive, and its valuation justified considering how fast its top line is growing. Investors should still strongly consider buying shares.

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Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.