Eli Lilly (LLY)

Total return at 5 years: 5.5%/year = 4.7% appreciation + 0.8% dividend. The target price ($1,488) is ex-dividend; the $54 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($1,183) and the other below.

Today — fairly valued: at $1,183 trades ~4.7% below its value discounted to today (~$1,241); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($1,488) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$774.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($1,183) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The implied growth (13.2%/year) is in line with our base case (13.0%/year) → the price is consistent with the projection.

That growth implies ~$49.7 bn of owner earnings in year 5 (vs ~$49.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT (ex-IPR&D). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the actual TTM (revenue $79.67bn as of Jun-2026, built by levels from the Q2'26 8-K) and the projection is a series of 12-month windows. Year 1 starts from the guidance the company raised on Aug 5, 2026, reading its two anchors: revenue of $85 to $87bn and performance margin of 49.0% to 50.5%. But guidance is calendar-based and the model's window closes three months after the guided year, so year 1 is built by levels rather than copied: the second half of 2026 is derived by subtracting the first half already reported from the guided full year, and the first half of 2027 runs at each scenario's pace. That leaves year 1 at +16.8% rather than the +28.7% the model carried against an older year-0, and along the way it resolves the reacceleration that would have remained had only the year-0 been moved. Guidance itself implies the deceleration: the second half of 2026 grows 17.2% year-over-year against the first half's 51.2%, which benefited from sales milestones and estimate adjustments for discounts and rebates. From there the rate decays geometrically to 12.7% by year 5, the ceiling of the band the method allows a quality compounder with a reinvestment runway. Year 1's margin (47.1%) also sits below the TTM (47.9%) for the same reason, then rises very slowly afterward on operating leverage — without stacking margin expansion on top of the revenue increase. The entry multiple (EV over ex-IPR&D operating income) compresses toward ~15x as normalized operating income nearly doubles, from ~$38bn to ~$75bn. Cash is not accumulated, and the model now states this explicitly (`reinvestsExcess`) rather than it falling out by coincidence of a depressed trailing-twelve-month flow: the surplus is redeployed into incretin manufacturing capex ($9.9bn in the TTM), purchases of in-development assets ($3.5bn in the half), and acquisitions ($9.8bn in the half), and the period's cash increase came alongside new debt — gross debt rose from $43.4bn to $54.9bn — which is not shareholder value. Buybacks bring the share count down from 894 to ~855 million over five years (−0.9% per year, funded from cash flow and net of stock-based compensation). Watch: the depth of the regulated price cut on realized price — in Q2'26 realized price fell 13% consolidated, 3% in the United States and 36% outside it, on Mounjaro's addition to China's reimbursement list — and the deceleration of tirzepatide volume.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $1,488 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $1,183, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $1,488 in 5 years plus $54 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $1,241. Against the current market price ($1,183), the margin of safety is 4.7% (trades below the maximum → there is margin) and the total return at that price would be 5.5% annually.

• Multiple vs. quality. EV/EBIT ~29×, above the ceiling of the pharmaceutical band (22×). Extreme premium.
• Favorable scenario. Even the favorable scenario (revenue of ~US$181 billion and a margin approaching ~52% by year five) returns +6%.
• Margin of safety. Base case +6%/year, below the required average return (10%) → far from the required margin. Priced for perfection.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC exceeds the cost of capital. ROIC ~38% vs the 10% bar → massive value creation per dollar of capital.
• Margin and operating leverage. Operating margin ex-IPR&D 30%→47.9% while revenue nearly tripled — extraordinary operating leverage.
• Cash quality. SBC ~1% (no trap). Reported FCF ($11.8bn) is depressed by growth capex, not accruals — owner earnings ~$26.5bn.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The engine is volume × price of the incretins (tirzepatide): Mounjaro (diabetes) + Zepbound (obesity) = 64.7% of first-half 2026 revenue. In the second quarter of 2026 volume grew 60% and the realized price fell 13% (−3% in the U.S.; −36% outside the U.S., from the addition of Mounjaro to China's National Reimbursement Drug List) — access expansion more than offsets it. Key products in immunology, oncology, and neuroscience grew 121% in the quarter.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. +48% in the second quarter of 2026, with volume up 60% (not FX or an easy comp); realized price is a drag (−13%).
• Growth engine. Concentrated in tirzepatide (56-65% of revenue) plus the successor pipeline. Powerful but concentrated.
• Deceleration and cycle. The base case decelerates it from ~+17% in year 1 to ~+13% in year five, as pricing cuts and the law of large numbers take hold.

• Relevant in 10 years (recurrence). Chronic diabetes/obesity drugs will still be used in 10 years; the TAM is growing. High recurrence.
• Pricing power. High from patents, but under regulatory pressure (MFN/IRA): the realized price is already falling ~13%. Pricing power is constrained by US policy.
• Moat and its direction. Wide and stable moat: 2036 patent, manufacturing scale, its own successor pipeline.
• Capital cycle. Very high returns attract competition (Novo, Amgen, Roche) — but the patent + installed capacity + R&D sustain the lead for years.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)37.1x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 100% of ROIC
• ✓Value creation (ROIC − 10% bar)+28pp
• !Malinvestment test (capex vs incremental ROIC)Strong investment mode 4.3x
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.8% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt of ~US$46 billion; rose funding capex plus M&A, but equity kept pace.
• Coverage and capex. Interest coverage ~37×. Capex up 6x but productive (high incremental ROIC) — not malinvestment.
• Cash quality. SBC ~1%; FCF depressed by growth, not accruals.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Ricks ~816,000 shares (<1% given the company's size); Lilly Endowment 9.8%. Compensation mostly in equity, tied to ROIC (SVA).
• Capital allocation. Reinvests at high ROIC (manufacturing capacity) and returns the rest; but buying back at 41× normalized earnings is expensive.
• Integrity / normalization. The comp committee excludes IPR&D/impairments from the bonus → the same owner-earnings philosophy; revenue +207% under Ricks.

• No source of discount: it trades at ~29× EV/EBIT, above the ceiling of the pharmaceutical band, with extensive coverage.
• The market already explicitly pays for GLP-1 growth — treating it as a 'high-growth platform,' not a traditional pharma.
• Even the favorable scenario returns +6%: the price discounts near-flawless execution; perception is not better than reality.

With no missing buyers or motivated sellers → it's not cheap; it's a great business at a price that discounts near-flawless execution. Quality is top-tier, but the price leaves no margin.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -6%/year (-28% total): the margin of safety protects the downside. The bull (+13%/year, +87% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Pricing (MFN/IRA). The US pricing cut is already deepening (−13%) and extending to more products — the structural disconfirmer.
• Multiple of perfection. ~29× EV/EBIT leaves little margin: a deceleration or a disappointment compresses the multiple sharply.
• Competition. Novo (oral first), Amgen, Roche — the next generation could erode share.
• Concentration. 56-65% of revenue in tirzepatide; the case depends on a single molecule plus its successor.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 38% above the 10% bar, but the margin is limited (+5%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 13% at a multiple/growth of 2.2 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 3% (EBIT/EV) + ROIC 38% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 13%, in line with our 13%: perception and reality aligned.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -8%/yr, bull-scenario ceiling +13%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, switching costs, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 13%, within what we project (13%) — the story squares with the numbers.