Amgen Inc (AMGN, Financial) recently reported a daily gain of 2.71%, and a three-month gain of 19.72%. With an Earnings Per Share (EPS) (EPS) of 14.83, the question arises: Is the stock fairly valued? This article aims to provide a comprehensive analysis of Amgen's valuation and encourage readers to delve into the following analysis.
Amgen is a renowned leader in biotechnology-based human therapeutics, with a historical expertise in renal disease and cancer supportive-care products. Some of its flagship drugs include Epogen, Aranesp, Neupogen, Neulasta, Enbrel, and Otezla. The company's stock price currently stands at $271.46, which is compared against its GF Value of $263.31.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price 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.
Given this, Amgen's stock is believed to be fairly valued. This is based on the GF Value estimate that considers historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. Because Amgen is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Evaluating Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. Amgen has a cash-to-debt ratio of 0.56, which ranks worse than 59.02% of 1059 companies in the Drug Manufacturers industry. The overall financial strength of Amgen is 5 out of 10, which indicates that the financial strength of Amgen is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Amgen has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $26.60 billion and Earnings Per Share (EPS) of $14.83. Its operating margin is 35.72%, which ranks better than 96.75% of 1046 companies in the Drug Manufacturers industry. Overall, the profitability of Amgen is ranked 9 out of 10, which indicates strong profitability.
Growth is a crucial factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Amgen is 8.2%, which ranks better than 57.03% of 924 companies in the Drug Manufacturers industry. The 3-year average EBITDA growth rate is 2.7%, which ranks worse than 61.91% of 890 companies in the 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 18.89 while its WACC came in at 7.07.
In summary, the stock of Amgen (AMGN, Financial) is believed to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 61.91% of 890 companies in the Drug Manufacturers industry. To learn more about Amgen stock, you can check out its 30-Year Financials here.
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