The stock of Amgen (NAS:AMGN, 30-year Financials) appears to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $236.85 per share and the market cap of $136.1 billion, Amgen stock gives every indication of being fairly valued. GF Value for Amgen is shown in the chart below.
Because Amgen is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 11.5% over the past three years and is estimated to grow 3.08% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Amgen has a cash-to-debt ratio of 0.32, which which ranks worse than 73% of the companies in Drug Manufacturers industry. The overall financial strength of Amgen is 4 out of 10, which indicates that the financial strength of Amgen is poor. This is the debt and cash of Amgen over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Amgen has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $25.2 billion and earnings of $12.07 a share. Its operating margin is 35.42%, which ranks better than 96% of the companies in Drug Manufacturers industry. Overall, the profitability of Amgen is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Amgen over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Amgen is 11.5%, which ranks better than 68% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth is 8%, which ranks in the middle range of the companies in Drug Manufacturers industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Amgen's ROIC is 18.34 while its WACC came in at 4.86. The historical ROIC vs WACC comparison of Amgen is shown below:
In conclusion, Amgen (NAS:AMGN, 30-year Financials) stock is estimated to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Drug Manufacturers industry. To learn more about Amgen stock, you can check out its 30-year Financials here.
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