Amgen Has Surprised Again

| About: Amgen Inc. (AMGN)

Summary

Amgen delivered strong fourth quarter 2015 financial results, which beat EPS expectations by a big margin, and raised its guidance for 2016 earnings.

Amgen laid an important groundwork for its future growth with four innovative launches in oncology and two in cardiovascular disease over the past 12 months.

Amgen generates strong cash flow and returns value to its shareholders by stock buyback and increasing dividend payments.

The average target price of the top analysts is at $186.50, up 22.1% from the January 29 closing price, which appears reasonable, in my opinion.

Yesterday, on January 28, Amgen Inc. (NASDAQ:AMGN) reported full year and fourth quarter 2015 financial results, which beat EPS expectations by a big margin of $0.32 (14.0%), and raised its guidance for 2016 earnings. Fourth-quarter revenue rose 4% to $5.54 billion from a year earlier, compared with an average analyst prediction of $5.53 billion. Amgen has shown earnings per share surprise in nine of its last ten quarters, as shown in the table below.

Data: Yahoo Finance

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

2015 was an exceptional year for Amgen with six innovative new launches, strong financial performance, continued pipeline advances and improved operating margins driven by our transformation efforts. We remain on track to meet or exceed our 2018 commitments and deliver value for patients and shareholders.

Amgen also raised its guidance for 2016 earnings due to revised timing assumptions for biosimilar competition and permanent extension of R&D tax credit. For the full year 2016, the company now expects:

  • Total revenues in the range of $22.0 billion to $22.5 billion and adjusted EPS in the range of $10.60 to $11.00. Previously, the Company expected total revenues in the range of $21.7 billion to $22.3 billion and adjusted EPS in the range of $10.35 to $10.75.
  • Adjusted tax rate to be in the range of 19.5 percent to 20.5 percent, which includes the benefit of the federal R&D tax credit.
  • Capital expenditures to be approximately $700 million.

I was impressed by the fact that Amgen was able to increase its operating margin in the fourth quarter to 44.4%, an increase of 5.1% year-over-year, which was helped by the company's restructuring programs. For the full year 2015 operating margin was at 48.0% a 4.1% rise from 2014. Amgen achieved 8% revenue growth in 2015 compared to the previous year. In order to maintain sales growth, the company has invested heavily in research and development, introducing six new drugs in 2015, including cholesterol treatment Repatha and cancer medicine Kyprolis. According to the company, it will report results from a final-phase trial for bone-builder romosozumab in the first quarter, and from a mid-stage trial of a migraine medication in the second half of the year.

Enbrel, the first biologic prescribed by rheumatologists, accounted for 27% of total product sales in the fourth quarter. The drug sales increased 8% year-over-year for the fourth quarter driven by net selling price, offset partially by the impact of inventory changes and competition. Sales increased 14% for the full year driven by net selling price, offset partially by the impact of competition.

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Source: Q4 2015 Amgen Earnings Conference Call Presentation

Neulasta, which is used to prevent a lack of certain white blood cells caused by receiving chemotherapy, accounted for 21.7% of total product sales in the fourth quarter. Neulasta sales decreased 2% year-over-year for the fourth quarter driven by lower unit demand and unfavorable changes in foreign exchange rates, offset partially by net selling price. Sales increased 3% for the full year driven by net selling price, offset partially by unfavorable changes in foreign exchange rates.

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Source: Q4 2015 Amgen Earnings Conference Call Presentation

I see high growth prospects for the company. According to Amgen, it laid important groundwork for its future growth with four innovative launches in oncology and two in cardiovascular disease over the past 12 months. Amgen expects Repatha and Kyprolis to be significant opportunities for the company. Behind its six new product launches are some additional exciting, innovative pipeline opportunities, notably romosozumab in bone health; and AMG 334, which is directed at a migraine in the neuroscience area. Also, of note is its nephrology product, etelcalcetide, which is under regulatory review, and omecamtiv mecarbil, which is an intriguing opportunity for the company in cardiovascular disease.

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Source: Q4 2015 Amgen Earnings Conference Call Presentation

Valuation

Since the beginning of 2015, AMGN's stock is down 4.1% while the S&P 500 Index has decreased 5.8%, and the NASDAQ Composite Index has lost 2.6%. However, since the beginning of 2012, AMGN has gained an impressive 138%. In this period, the S&P 500 Index has increased 54.3%, and the Nasdaq Composite Index has risen 77.1%. Nevertheless, considering its good valuation and high growth prospects the shares still have much room to grow. According to TipRanks, the average target price of the top analysts is at $186.50, up 22.1% from the January 29 closing price, which appears reasonable, in my opinion.

AMGN Daily Chart

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AMGN Weekly Chart

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Charts: TradeStation Group, Inc.

Amgen's valuation is very good. The current ratio is very high at 5.40, and the forward P/E is low at 12.62. The PEG ratio is at 1.46, the price-to-free-cash-flow ratio is at 17.96, and the Enterprise Value/EBITDA ratio is at 10.87.

Amgen started to pay a dividend in August 2011. The forward annual dividend yield is at 2.62%, and the payout ratio is only 35.2%. The annual rate of dividend growth over the past three years was very high at 63.3%.

AMGN Dividend Chart

AMGN Dividend data by YCharts

During the fourth quarter, the company repurchased 1.2 million shares of common stock at a total cost of $184 million. For the full year, the company repurchased 12 million shares of common stock at a total cost of $1.85 billion. At the end of 2015, the company had $4.9 billion remaining under its stock repurchase authorization.

Summary

Amgen delivered strong fourth quarter 2015 financial results, which beat EPS expectations by a big margin of $0.32 (14.0%), and raised its guidance for 2016 earnings. Amgen has shown earnings per share surprise in nine of its last ten quarters. I was impressed by the fact that Amgen was able to increase its operating margin in the fourth quarter to 44.4%, an increase of 5.1% year-over-year, which was helped by the company's restructuring programs. I see high growth prospects for the company. According to Amgen, it laid important groundwork for its future growth with four innovative launches in oncology and two in cardiovascular disease over the past 12 months. Amgen's valuation is very good, the current ratio is very high at 5.40, and the forward P/E is low at 12.62. Moreover, the company generates strong cash flow and returns value to its shareholders by stock buyback and increasing dividend payments. The average target price of the top analysts is at $186.50, up 22.1% from the January 29 closing price, which appears reasonable, in my opinion.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.