Eli Lilly...whoa nelly?

I have never ventured into investing in pharmaceutical companies before. It seems that sometimes the analysis of future business prospects in this industry is far too complex and unstable to warrant security analysis and investing in pharmaceutical companies. Having said that, I must say that Eli Lilly's valuations look absolutely phenomenal. The company popped up on my screen because the fundamentals were so strong and the multiples looked very attractive:

P/E: 7.8 (lowest in the industry of major pharm.)
P/B: 3.26
ROE: 40.8% (one of the highest in the industry)
ROA: 16.4%
FCFPS: $2.51

The company has comparably low debt and is in a very stable financial position. Very rarely do I run a DCF valuation and have to MAKE the company un-undervalued! I used a discount of 15%, free cash growth of only 5% --decreasing 10% annually, 1% terminal growth AND a 20% margin of safety:

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These are obviously very conservative measures for a company like Lilly. However, this does not go without concern. I know that as value investors, we seek companies that have a divergence between fundamental performance and stock performance. Lilly is definitely cheap, but the company has been very stagnant since the highs of 2000-2001:

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Many companies that I have researched and pursued in the past have had temporary stints of poor stock performance. That is, some sort of catalyst (such as missed earnings) pushes the stock unnecessarily far down. Lilly is a different case. The company' stock has systematically lost investor money over the last decade. The main upside for these longer term investors is that Lilly pays a juicy 5.6% dividend yield.

The question will come down to whether the pharmaceutical industry will see the necessary increase in optimism to warrant a revaluation of Lilly and its competitors. So far, I would not make an outright recommendation to purchase the stock unless you are very long term. The price is right though...