Company Overview: Amgen Inc., (NASDAQ:AMGN) a biotechnology medicines company, discovers, develops, manufactures, and delivers human therapeutics based on advances in cellular and molecular biology primarily in the United States, Europe, and Canada. The company markets primarily recombinant protein therapeutics in supportive cancer care, nephrology, and inflammation. Its principal products include Aranesp and EPOGEN erythropoietic-stimulating agents that stimulate the production of red blood cells; Neulasta and NEUPOGEN, which selectively stimulate the production of neutrophils, a type of white blood cell that helps the body fight infections; and Enbrel, an inhibitor of tumor necrosis factor that plays a role in the body’s response to inflammatory diseases.
Prognosis: The stock has been dead money for almost a year while the market has run up 25% over the same time period. As the market has rotated to more defensive sectors over the last few weeks from high beta stocks, I see AMGN significantly outperforming the market over the next 6 months.
Valuation: AMGN is selling for approximately 11 times this year’s consensus earnings and a little over 10 times next year’s projected earnings. It has over $5 billion in net cash on its balance sheet. It is selling at the low end of its five year range for P/E, P/S, and P/CF.
Catalysts: There are several factors that I believe should provide support for a higher stock price in the near and medium term:
- The rollout of Prolia should help engineered a 4% increase in revenues in 2012.
- Company throws off huge cash flow which it is using to buy back stock and could acquire new growth assets. If it had the average dividend payout of the S&P 500, it would yield over 4%.
- Given all the merger activity recently, Amgen could eventually be bought by a large pharma company for its biotech portfolio and pipeline
- Any possible rollback or modification of Obamacare should be positive for the stock and sector.
Recommendation(s): Given its low valuation and strong cash flow, I feel stock is currently undervalued. In my opinion, the stock should be trading at a more reasonable rate of approximately 13-14 times this year’s projected earnings of $5.15/share. My target price is $67-$72, up from the current price of $57.50.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMGN over the next 72 hours.