Since I first explained here why Amgen (AMGN) was more undervalued than Johnson & Johnson (JNJ), the former has soared by 15.7%, beating the latter more than 20x over. Amgen further beat the return of the Dow Jones by 1,140 bps. In light of the recent success, an additional review is in order. Based on my multiples analysis and DCF model, I find that Amgen continues to provide the value play that J&J does not.
From a multiples perspective, J&J is the cheaper of the two. It trades at a respective 15.9x and 12.5x past and forward earnings while Amgen trades at a respective 16.9x and 11.5x past and forward earnings. J&J further offers a dividend yield that is 140 bps higher at 3.5%. But here is the catch. Amgen is facing patent expiry issues, exposed to tremendous biosimilar competition, and has greater expectations for accelerating earnings. This makes the firm a much greater takeover target than J&J.
At the third quarter earnings call, J&J's management noted only decent results:
Worldwide sales to customers were $16 billion for the third quarter of 2011, up 6.8% as compared to the third quarter of 2010. On an operational basis, sales were up 2.6%, and currency had a positive impact of 4.2%.
In the U.S., sales decreased 3.7%. In regions outside the U.S., our operational growth was 8.3%, while the effective currency exchange rates positively impacted our reported results by 8.1 points.
The Western Hemisphere excluding the U.S. grew by 17.1% operationally, while the Asia-Pacific, Africa region grew 8.1% on an operational basis. Europe grew 4.9% operationally.
The company released several major drugs in 2011. Zytiga prescriptions have been flat in recent months and although J&J claims that this is due to IMS not capturing all channels, I view it is a clear check in the "negatives" column. Complera - a treatment for HIV - has also not been as successful as Gilead's (GILD) Atripla over this time following release. Xarelto may have just started to penetrate the market, but Boehringer Ingelheim's Pradaxa already has a formidable 8.2% share that will be nearly impossible to take away.
Consensus estimates for J&J's EPS forecast that it will grow by 4.2% to $4.96 in 2011 and then by 5.2% and 7.1% more in the following two years. Assuming a multiple of 15x and a conservative 2012 EPS of $5.19, the rough intrinsic value of the stock is $77.85, implying 19.8% upside. If the multiple were to decline to 13x and 2012 EPS turns out to be 2.9% below consensus, the stock would be fairly valued. It is rated a "buy" on the Street.
Amgen, in my view, has meaningfully greater upside. Prolia and Xgeva will help drive top-line momentum. I am highly bullish on the company's cancer drugs, which raise rewards and attract investors. Xgeva could achieve a $5B peak in the next decade from cancer indication. Epogen and Aranesp for anemia treatment, however, face headwinds from reimbursements and tougher labels. Amgen will also see five of its blockbuster drugs lose patent rights by 2015, which will result in an attractive takeover when the capital markets has fully recovered.
Consensus estimates for Amgen's EPS forecast that it will grow by 2.3% to $5.33 in 2011 and then by 10.7% and 12.4% more in the following two years. ASsuming a multiple of 15x and a conservative 2012 EPS of $5.65, the rough intrinsic value of the stock is $84.75, implying 25% upside. This exact same figure is yielded when modeling a CAGR of 8.4% for EPS over the next three years and then discounting backwards by a WACC of 9%. Accordingly, I further see outperformance by Amgen.