Take a Close Look at Amgen

Yesterday was a relatively slow day for news coming out of the markets, with about as much coverage of Super Bowl commercials as anything else. Perhaps Wall Street was a little slow in recovering from a night of partying after the New York Giants pulled off the stunning upset Sunday night. So, in lieu of market commentary, today’s piece will focus on a particularly undervalued stock out of the healthcare sector. Given current earnings, revenue, and dividend levels we could rationally expect Amgen, Inc. (AMGN) to sell in the range of $94 and $138. However, despite this rationally expected range based on historical norms, the stock is trading at just over $47.

At Ockham Research, our methodology focuses on historical price levels that the market was willing to pay for a stock, with the more recent years weighted more heavily. Based on these metrics, Amgen’s historical norm for Price-to-Cash Flow average annual low was 19.37 and average annual high was 27.99, but the current level is just 9.57. Furthermore, current price-to-sales is about 3.5, but that is a far cry from the average range of 6.68-10.15. For additional evidence, look at the price-to-earnings which is 16.8 and near the low end of its historically normal range of 14.6-61.6.

Ockham Research is not only positive on AMGN, but there are also significantly undervalued peers in the sector. AMGN is part of the Healthcare sector and is compared each week, along with its peers, against all of the other sectors that Ockham Research follows. This week, there has been an overall decline in the sector rating for the Healthcare sector reflecting higher valuations. However, this change has not been sufficient on its own to alter the ranking of the overall Healthcare sector. The Healthcare sector still ranks 1st place out of 10 sectors followed.

So, AMGN is undervalued by our methodology and we rate the Healthcare sector as the most attractive sector. Amgen stock has been beaten down over the last 12 months, but as is often the case, the best long term value buys are those that are selling at such cheap levels because of rocky performance. Also, it was announced today that Amgen will sell drug rights to Takeda, a Japanese pharmaceutical company. This should provide cash to assist Amgen during a restructuring where cost cutting is the big emphasis. As Amgen continues to cut costs and jobs, look for their price to come in line with more historically normal levels.