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Amgen - Not Worth Buying At Its Elevated Valuation

Dec. 22, 2014 10:10 AM ETAmgen Inc. (AMGN) Stock6 Comments
Stock Market Sherpa profile picture
Stock Market Sherpa
1.28K Followers

Summary

  • Shares in Amgen recently hit a new all time high and have now tripled over the last 36 months.
  • The firm's balance sheet is highly levered, but also contains a significant amount of cash.
  • Amgen recently announced a 30% dividend increase and has promised "meaningful" annual dividend increases through 2018.
  • However, a poor return on invested capital and a projected decline in future earnings growth leads to the conclusion that Amgen's share price has recently become overvalued.

Last week, Amgen (NASDAQ:AMGN) announced a 30% increase in its quarterly dividend. Although the stock still yields less than 2%, Amgen possess a diversified mix of profitable drugs (for aiding in the treatment of cancer, rheumatoid arthritis and other autoimmune diseases), a cash rich balance sheet and is one of the few biotechnology stocks that might meet the criteria of income investors. However, there are several potential concerns that individuals should have about includes shares of Amgen in their portfolio, including a below average return on invested capital, modest long term earnings growth potential and an elevated forward price to earnings ratio (compared to its historical average). This article examines Amgen's fundamental attributes to determine whether the DRAG framework believes its shares, despite trading near record highs, are undervalued.

Please click here to read my article which outlines the DRAG analysis framework in more detail.

To summarize, the four variables used in a DRAG (dividend and risk adjusted growth) analysis are as follows (each company is ranked from 0 to 3 in each category):
1) How cyclical is the industry in which Amgen operates?
2) How strong is Amgen's competitive position within this industry?
3) How risky is Amgen's balance sheet?
4) What is Amgen's dividend yield and dividend growth history?

The premise is that a company that operates in a non-cyclical industry, with a strong competitive position and a clean balance sheet that pays an attractive dividend should trade at a higher earnings multiple than a company without these attributes, even if the lower quality company has higher projected future earnings growth. After adjusting for these variables, it becomes easier to compare companies in different sectors with different levels of future growth potential.

Amgen DRAG Analysis:

Amgen Industry Analysis

Industry Beta

1.12

Stock Beta

0.51

10 Year

This article was written by

Stock Market Sherpa profile picture
1.28K Followers
A Canadian with numerous years of investment experience who has a BCom degree from a well respected Canadian university and has experience working in the wealth management industry.

Analyst’s 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.

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