What to Do with LLY, SIBN after Divergent Earnings Responses
It was a tale of two earnings responses with Eli Lilly (LLY) and Si-Bone (SIBN) yesterday.
Both companies handily beat top- and bottom-line estimates. But that hasn’t mattered much during this earnings season, where the average company that beats EPS estimates has fallen 0.5% – the worst response to earnings beats since the second quarter of 2011. So, it’s not a giant surprise that Si-Bone nose-dived more than 10% yesterday in response to perfectly fine earnings.
Here’s what Tyler Laundon, who first recommended the stock to his Cabot Small-Cap Confidential audience, had to say about the company’s solid report and unwarranted sell-off on Tuesday:
“SI-Bone (SIBN) reported yesterday afternoon that revenue rose by 30% to $33.3 million (beating by almost $2 million) and EPS came in at -$0.30, a penny better than expected. Management raised full-year guidance by $3.5 million to $133 million (at the midpoint), about $1 million more than the Q2 beat.
“This was the third consecutive beat and raise quarter. That said, management didn’t do the best job of explaining their seemingly extreme conservatism for the second half of the year given that guidance implies second half growth of only 15%, whereas first half growth was 38%. There was discussion of summer months being slower, both for surgeons and patients. And we saw some of that in Q2 with 935 active surgeons in Q2 versus 950 in Q1. However, apparently by the end of July active surgeon count was back above 950, so it seems there is just some variability here month to month.
“The company is doing more with its cash. Operating expenses were 3% lower in Q2 2023 versus Q2 2022, a fairly impressive accomplishment given revenue was up 30%. The company now has almost $170 million in cash after the May secondary offering (raised $84 million), so no liquidity concerns.
“While the stock sold off into earnings, and is down again today, this business appears to be doing very well. As a reminder, SI-Bone specializes in minimally invasive surgical implants for sacroiliac joint dysfunction, which presents as lower back pain. It is growing its portfolio of implants, tools and procedures so that surgeons can turn to SI-Bone for more of their cases.
We jumped into SIBN in May with a half-sized position and will stick with a buy half rating for now. Looking for an opportunity to buy the other half (we may be getting close).”
That’s right – Si-Bone’s post-earnings sell-off has Tyler closer to buying more SIBN shares. Given the nature of this upside-down earnings season, where seemingly no good result goes unpunished (with a few exceptions – see below), that’s the correct response. This 10% pullback is a buying opportunity in SIBN. Thus, we will keep our rating on the stock at Buy (Tyler has it as a Hold, but have a different entry point). If you have not already bought SIBN, you can now get it at a much cheaper price – on the heels of 30% revenue growth and newly raised full-year guidance, no less. BUY
That brings me to Eli Lilly (LLY). It too had a very good quarter. Did Wall Street punish the biopharma giant for such a transgression? On the contrary. LLY shares were up 14% on Tuesday in response!
Here’s what Tom Hutchinson, who originally recommended the stock to his Cabot Dividend Investor readers, had to say about it:
“WOW! Lilly reported earnings on Tuesday that blew away estimates because of soaring sales from its weight loss drug Mounjaro. Revenue grew 28% and earnings soared 85% over last year’s quarter and the company significantly raised future guidance. The market seems pleased as the stock is up over 18% on Tuesday morning to a new all-time high on an otherwise crummy day for the overall market. Diabetes drug Mounjaro, which is pending FDA approval this year for weight loss, sold $1 billion in the quarter versus a projected $740 million.
“Sales would have been higher, but Lilly couldn’t produce enough – a situation that is being remedied. Novo Nordisk also reported a 21% body weight reduction in its weight loss drug, which is prompting greater insurance coverage and a higher likelihood of the FDA approving similar drugs, which also increased the Street’s optimism for Mounjaro. By the way, Lilly is also expecting FDA approval for its other potential mega-blockbuster Alzheimer’s drug by the end of the year. It’s been a tough market for the healthcare sector. But nobody told LLY.”
With Tuesday’s run-up, we now have a 57% gain on LLY in four and a half months. That’s great! But it also means it’s time to book some profits. I recommend selling a quarter of your LLY shares and holding the rest; I wouldn’t recommend doing any new buying at the moment after yesterday’s huge gap up. SELL A QUARTER, HOLD THE REST