3 Reasons to Buy Amgen Before Earnings

Apr.18.11 | About: Amgen Inc. (AMGN)

Amgen (AMGN) is global biotechnology company that sells pharmaceutical drugs, including Aranesp and Epogen (anemia), Enbrel (rheumatoid arthritis), and Neulasta and Neupogen (which prevent infections in chemotherapy patients). Amgen earned $4.6 billion on $15.1 billion in sales in 2010. Net income was virtually unchanged from 2009 in spite of revenue increasing by $400 million as operating and other expenses outpaced the growth in revenue.

Despite its stable of proven drugs, analyst and investor attention has been focused on its highest-profile potential drug: Denosumab. After lagging for all of 2011, Amgen surged four percent the past 10 days to be up 60 basis points for the year. Since this strong rally precedes the earnings release on Wednesday, I researched to form a recommendation. Below I present three reasons why you should be long Amgen before earnings.

1. Strong Technical Indicators:

Chart 1: Performance Amgen vs. DJ Healthcare Index vs. S&P500 April 4-15, 2011

[Click all to enlarge]
Chart 1: Performance Amgen vs. DJ Healthcare Index vs. S&P500 April 4-15 2011Click to enlarge

In the last 10 days, the Dow Jones Healthcare Index is up less than two percent and the S&P 500 is down one percent. In contrast, Amgen is up four percent, which brings the stock into positive territory for the year. There was no significant unexpected news acting as a catalyst; therefore, it is possible that this outperformance is related to optimism surrounding Amgen’s upcoming quarter.

Chart 2: Amgen Daily Volume April 4-15, 2011

Chart 2: Amgen Daily Volume April 4-15 2011Click to enlarge

Chart 3: Amgen vs. 10- and 50-Day Simple Moving Averages (SMAs) YTD
Chart 3: Amgen vs. 10- and 50-Day Simple Moving Averages (SMAs) YTDClick to enlarge

Taken alone, each chart provides little value, but the consistent message portrayed by all three presents confidence that this rally is not a fluke.

2. Possible Dividend Initiation:

Bloomberg reported that Robyn Karnauskas, Deutsche Bank analyst, expects Amgen to utilize its $17.4 billion in cash to initiate a dividend. Mr. Karnauskas believes that a dividend is possible because Amgen’s new CFO, Jonathan Peacock, came from dividend-paying Novartis AG (NVS). According to Bloomberg projections, the dividend yield would be 2.3%, or $0.30 per share. To put this in perspective, Geoffrey Meacham, JPMorgan Securities analyst, states that “each one percent payout to investors would cost Amgen about $500 million.” In comparison, Pfizer (PFE) and Johnson & Johnson (JNJ) yield 3.9% and 3.6%, respectively. Neither Gilead (GILD) nor Celgene (CELG) currently pays a dividend.

The article sums up the implications well:

"A dividend, though, would signal Amgen’s transition from a growth company to a value stock that offers slow growth and predictable earnings, a concession the company may not wish to make," said Mark Oelschlager, a portfolio manager at Oak Associates Ltd., an Akron, Ohio, investment adviser that holds about 640,000 Amgen shares.

"A company is often reluctant to initiate a dividend because it feels to management like they are giving up on growth or they are afraid that investors will no longer view them as capable of growing,” Oelschlager said in an e-mail. “In most cases this is silly, as these companies, Amgen included, have already been recognized by the market as having lower growth prospects than before.”

Amgen’s official statement on the matter is that “Amgen does not pay a dividend on stock, and does not foresee doing so in the immediate future.”

3. Attractive Valuation:



Market Cap ($B)


Dividend Yield

















Johnson & Johnson










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Above is comparative information for a variety of healthcare and biotechnology companies, sorted by ascending P/E. As you can see, Amgen is still trading at a lower multiple than both smaller and larger rivals.

Amgen Year-to-Date PEClick to enlarge

Amgen hit a low P/E for the year of 10.8 and has rallied from that point. As a value investor, my philisophy is to find quality companies that are undervalued, and Amgen appears to fit the bill. The market will be expecting EPS of $1.29 on revenue of $3.68 billion, as well as positive results for new bone drugs Prolia and Xgeva, based on Denosumab. For the reasons detailed above, I recommend initiating a long position in Amgen before it releases it earnings on Wednesday.

Sources: All charts above were supplied by TDAmeritrade.

One of the oldest and most reliable technical indicators is the crossover, which involves the movement between SMAs of different durations. When the short-term SMA crosses below the long-term SMA, this is a bearish sign. In contrast, when the short-term SMA crosses above the long-term SMA, this is a bullish sign. In this case, I have selected the 10- and 50-Day SMAs. On February 7, there was a negative crossover, which precipitated a substantial decline from 55. Around April 5, there was a positive crossover that aligns with the positive moment in charts one and two.

Eight of the last 10 days have generally involved a higher price than the previous period. This strong, continuous buying supports the performance chart above. The assertion that four percent increase in the stock is not a short-term anomaly but more indicative of a longer trend. The notable exception was Friday, right at the close; however, this is not extremely disconcerting because this likely relates to normal volatility at the end of an option expiration period.

Disclosure: I am long AMGN.