Amgen: Opportunity May Be Knocking

The recent sell-off has created an opportunity for patient investors

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Dec 31, 2016
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Amgen (AMGN, Financial) is a large-cap biotechnology medicine company with a strong balance sheet and a history of solid fundamental growth. Shares that sold for over $175 during 2016 are now priced around $146.

The company’s own history suggests shares are fairly priced at current levels and well worth consideration for those seeking a high-quality, dividend-paying addition to a portfolio. But before we look at fundamentals and possible valuations, let’s understand headwinds facing the company and what management is doing to address the challenges.

Why the recent sell-off?

Amgen bears point to headwinds created by uncertainty around patent expiration of major revenue-generating products and lack of clarity over future industry regulations. These risks are real and have likely contributed to investor nervousness.

What is management doing to address the challenges?

Management has been very aggressive developing its pipeline for future drugs to replace those affected by patent expiration. In addition, leadership has invested heavily in more efficient manufacturing, while cutting costs to improve margins.

A history of fundamental growth

So the philosophy is that over the longer term, the market share price reflects the fundamentals of a company. Over the past 10 years, Amgen has shown impressive growth in fundamentals including revenue, free cash flow, operating earnings and book value per share.

A picture is worth a thousand words, so here are a few graphics courtesy of F.A.S.T. Graphs to better understand data trends.

Have a look at the growth in revenue per share over the past decade:

02May2017141324.jpg

Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved

Free cash flow has shown similarly impressive growth:

02May2017141324.jpg

Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved

Operating earnings have risen during the same time period:

02May2017141325.jpg

Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved

Lastly, book value per share has risen impressively:

02May2017141325.jpg

Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved

Based on this information, it is fair to conclude that Amgen leadership has done a very effective job of growing company fundamentals.

What are shares likely worth?

It seems reasonable to assess a company’s own history to determine a fair valuation compared to the price available from Mr. Market.

As we can see on the graph below, over the past five years, Amgen’s own normal PE ratio has been 15.6X earnings (blue line). At recent levels, Amgen is available for just 12.8X earnings (black line is the market price). Note the market price line below the normal valuation line as a visual of the possible opportunity.

Given the company’s efforts mentioned above, it seems very reasonable to assume a "return to the norm" and apply Amgen’s normal 15X multiple to estimated future earnings to arrive at a potential target valuation around $187 over the next 12 to 24 months.

02May2017141325.jpg

Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved

Summary

Shares of this large-cap market leader have sold off recently due to concerns about patent expiration and possible changes in industry regulation. The company has a large pipeline in place and is undertaking other efforts to combat the headwinds. Shares right now are available for around $146; the company’s own history suggests a valuation around $187 which would represent over 25% upside. Investors can also collect a dividend along the way.

Please vote and comment below - feedback from fellow investors always welcome.

Disclosure: Long AMGN, although positions can change at any time.

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