Motley Fool Hidden Gems Investing - Eli Lilly's Optimism

Episode Date: August 8, 2023

By one count, a drugmaker founded in 1876 is a more expensive stock than Tesla. (Time Stamp)  Ricky Mulvey and Bill Barker discuss: - Tesla’s CFO departure. - Eli Lilly hitting an all-time high, and the drugmaker’s optimistic results. - How Burger King is driving sales growth with limited time offers. - Zoom calling its employees back to the office. Companies discussed: TSLA, LLA, NVO, QSR, ZM Host: Ricky Mulvey Guest: Bill Barker Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news. The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Usually you say goodbye before you leave, but sometimes you forget you're listening to Motley Fool Money. i'm ricky movi joining us now is bill barker bill good to see you thanks for having me big news today tesla's chief financial officer zach kirkhorn well he stepped down from his role last friday kirkhorn is replaced by veibov taneja usually you find out a cfo is leaving before they step down bill even if they are staying on throughout the end of the year this this is a

little unusual? It's a little unusual, but not so unusual that the market seems to find it terribly disconcerting. You want CFOs to stick around and arrange an orderly transition and all that. So the suddenness of the announcement raises some questions, but behind the scenes, there don't seem to be big questions that are concerning the market players yet. or big questions that we may not know about from the outside. I mean, for newer listeners, the way a CFO steps down from a company can be a big deal. Why is this something that investors pay so much attention to? Well, in other situations, when a CFO steps down abruptly with little detail about why, then you're going to have questions about

whether there were any financial irregularities that either the CFO was responsible for and is being pushed out or is aware of and no longer wants to stick around and see addressed. So, that's one of the things that would lead to an abrupt announcement and a drop of a stock where there are questions, obvious questions that just don't seem to be answered. And, you know, in this case, the former CFO now is sticking around toward the end of the year. So, that removes some of the red flags about something improper going on. I think if one were to speculate, and plenty of people are out there willing to speculate, one of the leading speculations might be, I've made enough money, I've had enough headaches, I think I can do something

else with my time. Yeah. An incredible job helped build Tesla's valuation to upwards of a trillion dollars. And there's a lot of speculation, but I don't know. I still don't know why the stock is seemingly unaffected by this, because you either have a superstar player leaving for an unknown reason, or there's something not so great going on at the company. Right. And I think, as I say, if the speculation is landing upon the, you know what, do you want to spend your entire life with Elon Musk, regardless of how much money you're making, or are some of those headaches ones that you can decide to walk away from at a certain point? I think that's a narrative that people can believe, A, that he's already made enough money that he can choose whatever he

wants to do with his life, not just Elon, but Zach Kirkhorn as well. And also that hanging around with Elon Musk may be something that you want to keep to a finite period of your life. Once you've got all the money you want to make from that, and you can just do whatever you want, maybe subtracting those job responsibilities from your daily experience is worth lots. I think that the stock is down a little bit. Probably you've got some speculation beforehand that Kirkhorn would have made a good CEO and was possibly first in line to do that, as CFOs often are, and that in a world where Elon Musk has six or 10 or 12 companies that he's head of or whatever it is today, it'd probably be more in the future than it is today,

he may be willing to let somebody just run the business while he takes sort of a lesser role or a greater role at all the other things that are on Musk's attention. So, that part is gone. Kirkhorn is not going to be the next CEO. But you've got, I think, a situation here also where the suddenness is not such that you're bringing in an interim CEO, a CFO. You've got a CFO announced, and so it looks like there was more thought ahead of time than zero. A famously demanding employer. Hope he catches a little bit of rest. Let's move on to some earnings coverage. Eli Lilly hit an all-time high on its second quarter results this morning with positive news from its weight loss drug sales, positive research results,

and its Alzheimer's treatment. Here are some highlights. The weight loss drug Manjaro posted almost a billion dollars in sales for the quarter. Lilly reported no sales from its COVID-19 antibody treatments. Earnings per share jumped 86% from the year prior. Some of that did come in part from the sale of its emergency diabetes treatment for about $580 million. Bill, what stands out to you from that? Well, given the reaction of the stock, you know, what we're seeing is that obesity is going to be around and is a bigger situation than COVID. You can take zero on your COVID therapies and replace it comfortably with a billion from obesity therapies in the case of Manjaro. And that only really begins to scratch

the surface of the market opportunity for Lilly and the other pharmaceuticals that are pursuing obesity therapies. I think the sky is the limit is what investors are feeling today on where obesity therapies can scale to. Yeah. One of the big issues is will insurers pay for these treatments. There's been debate back and forth, well, mostly from the insurance side, not necessarily from the drug makers or the patients about if insurers have a responsibility to pay for this. There might be some increased pressure as Novo Nordisk, which has a rival weight loss drug, Wagovi, found that their medication helps reduce the incidence of heart attacks, strokes, cardiovascular deaths by 20% in obese and overweight people. You have to hope

that there is some increased pressure, but I also imagine that insurers will fight back on paying for these treatments. Yeah. I think insurers would just as soon save money and let people pay out of their own pockets for these, which they're willing to do and which there's probably more societal tolerance of just allowing companies to charge what they can charge in the market for obesity therapies, there isn't the same sort of moral, ethical dilemma that you might see for something like Alzheimer's, where at least society is willing to put some of some or all of the responsibility for addressing obesity on the individual, which wouldn't be the case with something like Alzheimer's. Nevertheless, there's billions and billions

and billions of dollars, whether it goes through insurance companies or whether it goes through insurance companies only for a select portion of the many obesity drugs that are out there. seen stories out there about the Hollywood stars getting their hands on medications that are not primarily related to obesity and taking over a portion of that. So, you know, you're not going to get a lot of societal pressure on insurance companies to cover that use case, but where there is a 20% reduction in cardiovascular disease, that is going to be something that I think is an easier pitch in terms of pressuring the insurance companies. And some of the other treatments, there's some mixed evidence that these GLP-1 drugs can affect

addictive behaviors. We'll see how those play out, but anything in the toolkit is good. Eli Lilly, if the weight loss drugs weren't good enough for you, they also highlighted some evidence for the Trailblazer ALZ-2 drug. It's Alzheimer's drug, which in a phase three trial showed that it significantly slowed cognitive and functional decline in people with early symptomatic Alzheimer's disease, expects regulatory action by the end of 2023. This is just one reason, Bill, or two primary reasons, I should say, that Eli Lilly, the drug maker founded in 1876, is now trading at a price-to-earnings multiple higher than Tesla. Yeah, that is quite a data point. And And it's mitigated somewhat by the fact that the sales for as soon as next year and the

earnings are scaling so fast at Lilly that the trailing earnings per share multiple might be in the 80s, but the forward multiple is closer to 40, because earnings per share next year, right now, and that was the data from before. Today's extremely good report from Lilly indicated that there would be upwards of $12 a share on a now $500-a-share stock. So, that earnings per share expectation for 2024 is likely to bump up and get more into the $13, maybe better than that, dollars per share. So, the forward multiple is a little bit more palatable at, say, 40 times earnings. Still awfully optimistic, but right now Lilly is in the middle of creating optimistic beliefs. It's meeting from quarter to quarter.

Showing positive results for a Phase III Alzheimer's drug is going to give a lot of people reasons to be optimistic, and I hope they can continue. Let's move to Restaurant Brands International, the owner of Tim Hortons, Burger King, Popeye's Chicken, and Firehouse Subs. RBI reported strong sales growth. They seem to have no trouble pulling people in, especially with those limited-time offers. Tim Hortons offering a barbecue crispy chicken flavor bowl in sparkling quenchers. Burger King had the Spider vs. Whopper with Swiss cheese and a lovely red bun. And Burger King is also in the middle of this $400 million turnaround plan, maybe with those limited time offers, taking market share for the first time in three years.

When you think about these trends in this business, is this the kind of candidate company for a ballast position in a portfolio? One you're not expecting a ton of growth from, but has some long lasting tailwinds. Well, certainly people have to eat every day. So that's a good thing to have in your business is supplying something that is a daily intake. In the U.S., across the brands, inflation was a good chunk of where the same-store sales growth came from. Traffic for the U.S. operations, I think, was actually flat to a little bit negative across Popeyes, Burger King, and Firehouse for the quarter over last year. But as you mentioned, it was the international sales, particularly Tim Hortons, which is doing the best job growing its menu, supplying more choices for people to dine there in the afternoon or evening, not just coming in for their coffee and a donut, but coming back for lunch options and for cold brews.

things that, you know, Starbucks has been dining out on for a long time and Tim Hortons has, for a major operation that it is, it still has room to catch up with what the trends have been for a while. You also have to question how hard you really have to try with the limited-time offers. In the case of Burger King, they brought people in with a vanilla sundae that just has red and black Pop Rocks candy on top of it. I guess dying a bun red in honor of the Spider-Man movie is also enough to get people in the door. You have to wonder where the marketing teams arrived at, whether somebody got the tie-in with the Spider-Verse movie and then handed off and said, do something with this, can you make some of our food red and or blue or black

in the case of the newer Spider-Man's costume. So, I think that it's a hodgepodge of ideas rather than a smooth blend. It's not natural, right? You don't naturally think of Spider-Man and hamburgers going together. But Americans and fast food dining Americans are creative enough and willing enough to expand the associations of these things to allow Burger King to get away with it, I guess. Yeah. I mean, why stop at Red Dot? You have a whole color universe of options to expand into. One other trend really affecting this business is that nobody wants to eat inside the restaurant. According to data from market research firm Cercana and a story in the Wall Street Journal, diners are eating just 14% of fast food orders in a restaurant. In 2015, it was 22%.

And yet, Restaurant Brands International is encouraging Burger King owners to spend thousands and thousands of dollars to renovate these locations with operators picking up most of the tab on those renovation bills? You know, I can certainly understand trying to do something to make dining in more attractive, because that's really not the part of the experience that I think many people think is a positive. Maybe that's as simple as just increasing internet connectivity at some of these locations, trying to get people to sit down for a while and think of Burger King as a place to hang out for some period of time. And I'm sure that it's been a while since they've upgraded some of the facilities based on very little study of the

issue by myself. But I can imagine that it would not take long to go through tens and hundreds of millions of dollars simply upgrading things which haven't been touched in a decade. For what it's worth, of all the fast food review videos that I've watched in preparation for this segment, no one was consuming on-site and quite a few people are eating burgers and shakes in their cars, which I understand doing that if you're on the move, but if you're in a parked car, I don't see the reason to get all of that excess food bits inside the driver's seat. Yeah, that's one of the downsides. The upside is that you don't have to be in the restaurant. Obviously, people are voting, if not with their feet, with their gas pedals

on that choice. That just creates more business for the mini vacuum producers, I guess. Let's hit this story. Zoom has told employees that if they live within 50 miles of an office. Those employees need to show up two days a week. A little bit of irony here, Bill, because this is kind of the company that really helped with that remote work situation. What do you think Zoom learned? I think Zoom has probably learned, one, that they hired too many people. And this is an additional way to get people to leave, perhaps, is if they are unwilling to come into the office, this will be a bit of an employee reduction. And that there is plenty of work that is better done in-person and supplemented by Zoom.

There isn't any work that I can think of which is best done on Zoom, better accomplished there than than in-person. There's plenty of work which can be done, I think, to varying degrees almost as well and there's some work that can't be done nearly as well. And two days a week seems to me to be a pretty small ask. And if they can get the rest of the world to sign on to two days a week as a minimum, everybody is still going to have to use Zoom or a competing product for the other 60% of the week. So, I don't think it really hurts for them to advertise their understanding that their business and their employee morale perhaps is improved by a hybrid work culture rather than a solely Zoom culture.

Yeah. I think more folks are learning about the trade-offs where early in the pandemic, There's these economics papers about how no productivity has been lost, and it's in part because people are working longer hours. And then the flip side of that, which there's more research being done now, is that it's because employees weren't spending time mentoring younger employees. So it became increasingly difficult for younger folks on the job how to do it and learn about the culture in their organization. So I think there's a few factors at play here. Yeah, I think Zoom is making the right move here. And as I say, they're not really turning their backs on the utility of their technology, because the implication is that if they are successful in this, two days a week, there will be an office culture and the benefits of working together in person. and the rest of the time, they're still relying on Zoom. So, I think that they're one of the many companies that is leaning more toward that kind of mix as time goes by. I don't see an avalanche

of it happening, but certainly, it's the trend. We'll see how it goes. Bill Barker, Appreciate your time and your insight. Thanks. Thanks for having me. As always, people on the program may have interests in the stocks they talk about, so don't buy or sell anything based solely on what you hear. Thanks for listening. I'm Ricky Mulvey. We'll be back tomorrow.