Amgen Has Yet To Reach Its Potential, Despite Strong Gains

| About: Amgen Inc. (AMGN)


By the end of 2015 these potential saving can send the stock to $150, or 15% higher.

Investors may not realize Amgen's value for a couple of more years.

Amgen one of Big Pharma's best stock's to own.

With shares of Amgen (NASDAQ:AMGN) trading at near 52-week highs, investors are getting nervous about the next couple of quarters. But it's not for the reasons you think.

We've followed Amgen pretty closely. And management has done exactly what they've promised to do, which is to control growth and generate profits. It's precisely the formula you want for a high-priced stock. Wall Street has taken notice.

Amgen stock closed Wednesday at $132.68 down 0.26%. Shares are up 18% on the year to date, besting the healthcare sector's 11% gain, according to Morningstar. But that's not why investors are worried. You see, these shares are up 60% in the past two years and 124% in the past five years. The healthcare sector has only posted 5-year gains of 20%.

While Amgen is not the cheapest stock in the sector from its price-to-earnings ratio of 21, investors can still do well just by holding.

Consider, not only is the company growing revenue at a double-digit clip, management is committed to ongoing cost controls, aimed at streamlining the business and growing shareholder value. The company is looking to save roughly $700 million annually by 2016 by reducing its headcount by 15% and reducing management layers.

By next year, these potential saving can send the stock to $150, or 15% higher.

What's more, given Amgen's 11% revenue growth rate, it doesn't make sense to compare the company's operational results to larger rivals Johnson & Johnson (NYSE:JNJ), GlaxoSmithKline (NYSE:GSK) and Pfizer (NYSE:PFE), which carry much lower P/Es. It's not an "apples-to-apple's" comparison.

Based on next year's estimates of $8.97, according to Yahoo, Amgen shares are only trading at 14 times forward earnings, almost 2 points below the industry average. This should dispel any concerns about whether the stock is expensive.

The other thing is, prior fears about Amgen's pipeline should now be put to rest. Consider the company is still growing revenue from its two blockbuster drugs, which make up 25% of Amgen's worldwide sales.

In the most recent quarter, Amgen generated $1.43 billion from the combination of Neulasta and NEUPOGEN, which is used to fight infection for patients undergoing chemotherapy. And Enbrel, the company's second best selling drug posted a 7% jump in revenue, reaching $1.24 billion. And management sees no signs of slowing down.

Combined with the better-than-expected revenue performance and the company's cost-cutting measures, management has recently up its full-year revenue guidance to come in between $19.5 and $19.7 billion. Earnings, meanwhile, are projected to come in between $8.20 and $8.40 per share, representing year-over-year earnings growth of 10%.

And when you consider that Amgen continues to invest in strong growth areas like oncology, the company has yet to reach it full potential. So despite the strong stock performance over the past couple of years, investors will not realize Amgen's value for a couple of more years, making Amgen one of Big Pharma's best stocks to own.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's healthcare sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.