Why Amgen Stock Is A Long-Term Investment Opportunity

Aug.27.14 | About: Amgen Inc. (AMGN)

Summary

Amgen has a top-quality pipeline that should sustain long-term growth.

Amgen's restructuring plan will provide savings and will enable the company to focus on growth areas.

Amgen is generating strong cash flows and returns value to its shareholders by increasing dividend payment.

Amgen Inc. (NASDAQ:AMGN) will continue to benefit from the growing demand for its products, and from its top-quality pipeline that should sustain long-term growth. Amgen's restructuring plan will provide savings and will enable the company to focus on growth areas. AMGN's stock has surged strongly since the start of 2012. In fact, its relative strength index (RSI) technical indicator is indicating overbought conditions. Since the beginning of 2012, AMGN's stock has gained an impressive 114%. Nevertheless, in my opinion, AMGN's stock still has room to move up. Amgen has decent valuation metrics and strong earnings growth prospects. Furthermore, Amgen is generating strong cash flows and returns value to its shareholders by increasing dividend payment.

The Company

According to the company, Amgen discovers, develops, manufactures, and delivers innovative human therapeutics. A biotechnology pioneer since 1980, Amgen was one of the first companies to realize the new science's promise by bringing safe, effective medicines from lab to manufacturing plant to patient. Amgen was founded in 1980 and is headquartered in Thousand Oaks, California.

Valuation Metrics

The table below presents the valuation metrics of AMGN, the data were taken from Yahoo Finance and finviz.com.

Amgen's valuation metrics are fairly decent. The next financial year forward P/E is pretty low at 15.03, and the average annual earnings growth estimates for the next five years is high at 9.72%. The PEG Ratio is not excessive at 1.65.

Latest Quarter Results

On July 29, Amgen reported its second-quarter 2014 financial results, which beat EPS expectations by $0.30 (14.50%), and beat Street's consensus on revenues.

Total revenues increased 11 percent to $5,180 million, with 8 percent product sales growth driven by strong performance across the portfolio, particularly Enbrel (etanercept), Kyprolis (carfilzomib), Prolia (denosumab) and XGEVA (denosumab). Adjusted EPS grew 25 percent to $2.37, driven by higher revenues and a significant increase in the profitability of Enbrel. Adjusted net income increased 26 percent to $1,823 million.

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Source: Q2 2014 Amgen Earnings Conference Call Presentation

In the report, Robert A. Bradway, chairman & chief executive officer, said:

Robust growth through the first half of 2014 affirms the underlying strength of our business. We are making excellent progress in advancing our pipeline as we prepare to launch a number of promising new innovative medicines. From a position of strength, we have announced today restructuring initiatives that will allow us to reallocate resources to invest in our upcoming launches and drive growth.

Dividend

Amgen started to pay a dividend in August 2011. The forward annual dividend yield is at 1.81%, and the payout ratio is only 32.6%.

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Source: Investor Insights Newsletter - Q2 2014

Since the company generates lots of cash, and the payout ratio is very low, there is a good chance that the company will continue to raise its dividend payment.

Competitors

A comparison of key fundamental data between Amgen and its main competitors is shown in the table below.

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Amgen has the lowest EV/EBITDA ratio and the lowest price-to-free-cash-flow among the stocks in the group, and it is the only one that pays a dividend. However, it has the highest PEG ratio and the lowest earnings growth estimate (see my articles on GILD and CELG).

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The AMGN stock price is 4.96% above its 20-day simple moving average, 10.00% above its 50-day simple moving average and 14.66% above its 200-day simple moving average. That indicates a short-term, mid-term and a long-term strong uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 1.71 and ascending, which is a bullish signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 70.96 which indicates overbought conditions.

Analyst Opinion

Many analysts are covering the stock, and most of them recommend it. Among the twenty-four analysts, five rate it as Strong Buy, nine rate it as a Buy, and ten analysts rate it as a Hold.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering AMGN stock, there are thirteen analysts who have the four or five star rating, seven of them recommend the stock, and six analysts rate it as a Hold.

On July 30, Piper Jaffray analyst Joshua Schimmer reiterated an Overweight rating and boosted his price target on Amgen to $150.00 (from $143.00) following "robust" Q2 results after the close. According to Mr. Schimmer, AMGN is in the midst of transitioning from its mature franchise products to a new era of promising pipeline candidates.

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Source: TipRanks

Major Developments

Amgen continues to progress with its top-quality pipeline. On August 18, the company announced that a second placebo-controlled Phase 3 study evaluating AMG 416 for the treatment of secondary hyperparathyroidism in patients with chronic kidney disease, receiving hemodialysis, met its primary and all secondary endpoints. These results follow the recent announcement of positive data from a prior placebo-controlled Phase 3 study of AMG 416 which was similar in design and size.

Earlier on August 04, Amgen and its subsidiary, Onyx Pharmaceuticals, announced that a planned interim analysis demonstrated that the Phase 3 clinical trial ASPIRE met its primary endpoint of progression-free survival. Patients treated with Kyprolis for Injection in combination with Revlimid and low-dose dexamethasone lived significantly longer without their disease worsening (median 26.3 months) compared to patients treated with Revlimid and low-dose dexamethasone (median 17.6 months).

In addition to presenting second-quarter results, Amgen announced a restructuring plan to invest in continuing innovation and the launch of its new pipeline molecules, while improving its cost structure. Initial efforts include streamlining the organization, reducing layers of management, increasing managerial spans of responsibility and beginning implementation of a revised geographic site plan. As a first step, the Company will reduce staff by 2,400-2,900, beginning later this year and continuing through 2015, predominantly in the U.S. This represents approximately 12 percent to 15 percent of Amgen's global workforce. The Company will also close its facilities in the states of Washington and Colorado. The Company will expand its presence in the biotechnology hubs of South San Francisco, Calif., and Cambridge, Mass., and retain its headquarters in Thousand Oaks, California, with a reduced number of staff consolidated into fewer of the existing buildings.

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Source: Q2 2014 Amgen Earnings Conference Call Presentation

Along with second-quarter results, Amgen raised its 2014 outlook:

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Source: Q2 2014 Amgen Earnings Conference Call Presentation

Amgen has been able to show significant earnings per share surprise in three of the last four quarters, as shown in the table below.

Data: Yahoo Finance - Analyst Estimates

Since the company has succeeded to beat analysts' expectations in three of the last four quarters, there is a good chance, in my opinion, that Amgen will continue to surprise by reporting better than estimated results also in the future.

AMGN's stock started its strong rally in January 2012 and continued to perform well. Since the start of the year, AMGN's stock has gained 20.2%, while the S&P 500 index has risen 8.2%, and the Nasdaq Composite Index has increased 9.4%. Moreover, since the beginning of 2012, AMGN's stock has recorded an impressive gain of 113.6%, while the S&P 500 index has increased 59.0% and the Nasdaq Composite Index has risen 75.4%. Nevertheless, considering its decent valuation metrics and strong earnings growth prospects, the stock, in my opinion, still has room to move up.

My Take

In my opinion, Amgen's management decision to initiate a restructuring process, while the company is doing well, will benefit its shareholders. In addition to the savings anticipated from this move, a leaner company focusing on growth areas can come out.

I see strong revenue and earnings growth prospects for the company. Amgen has top-quality pipeline, in fact, it has 14 compounds in Phase III clinical trials that should sustain long-term growth. The company remains on track to file for approval of evolocumab (cholesterol management) in the third quarter. Amgen has already filed for regulatory approval of ivabradine (chronic heart failure). In addition, Management provided an update on its new product pipeline during the second-quarter conference call. Amgen's goal is to have ten new drugs on the market or awaiting FDA approval by 2016. Furthermore, Amgen is launching its next generation of blockbuster drugs, Prolia and XGEVA, which are offsetting weaker sales of older products.

Conclusion

Amgen will continue to benefit from the growing demand for its products. Amgen has top-quality pipeline that should sustain long-term growth. Moreover, the restructuring plan will provide savings and will enable the company to focus on growth areas. Amgen has decent valuation metrics and strong earnings growth prospects. Furthermore, Amgen is generating strong cash flows and returns value to its shareholders by increasing dividend payment; the company generated $2.1 billion of free cash flow in the last quarter compared with $1.4 billion in the second quarter of 2013. All these factors bring me to the conclusion that AMGN's stock still has room to move up.

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

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.