Amgen: Lost in the Biotech Bargain Bin

When markets get crazy you can sometimes pick up world-leading companies at extraordinary prices. I believe that type of opportunity exists right now in Amgen (AMGN).

• Amgen: [NDQ:AMGN] current price $41.15
• 52-week range: $39.16 [today] - $66.06 [ May 2, 2007]

Amgen and Genetech [DNA] are the two most profitable biotech companies on the planet. While many lesser biotech names continue to lose money year after year Amgen has been profitable each year since the early 1990's.

Amgen earned $0.82 /share in 1998 and $3.31 /share in operating earnings in 2007. Revenues grew from $2.71 Billion to $14.7 Billion over those 10 years. Cash Flow/share increased from $0.99 to $4.02 in the same span.

By definition, AMGN has been a premier growth company in an exciting industry. Yet these high quality [Value Line financial strength rating: A+] shares hit a new 6-year low today. Not only are they absolutely low priced but the current P/E is just 10.4x median EPS projections for 2008.

Amgen shares have traded at multiples ranging from 20x - 80x over the past decade but have never been this cheap EVER before. Sales and earnings are both likely to hit all-time highs this year so I see no reason for these shares to remain at such a depressed valuation.

As of year-end 2007 AMGN held over $7.1 Billion in their treasury or about $7/share cash. Earnings predictability is high at the 85th percentile and AMGN's Beta is low at 0.80. Their 10-year median P/E has been 31x and the lowest annual average P/E since 1995 has been last year's 17.4x multiple.

With consensus estimates of $4.00 for this year a return to even 17 times that number would bring Amgen shares back to $68 or up $28.00 [+70%] from today's price.

Is a $68 12-month target price realistic? AMGN shares actually hit peak prices of $66.90 - $86.90 in each calendar year from 2003 through 2007. Record high sales and earnings should certainly be able to support similar prices to those achieved when fundamentals were far below this year's levels.

Value Line rates these shares 'above average' for safety.

Amgen has a high quality, low risk profile and a historically low P/E. The shares are right at multi-year lows while expectations are for record numbers in 2008.

Genetech (DNA) had a similar fall from investor favor previously. DNA shares peaked at $100.20 in December 2005 before falling all the way down to $65.40 in December 2007. DNA shares hit as high as $79.06 today and now trade at > 30x trailing earnings.

Just a change in mood could see a nice rebound in Amgen's share price also. Ironically, the 'momentum guys' will be much happier buying it at $50 on the way back up to $68 than loading up on shares today in the $41's.

Why not be smarter than them and pick up some shares below the lows from 2003 - 2007?

13 of our Gurus owned AMGN as of year-end 2007. Dec. 31, 2007 close: $46.44

Disclosure: I bought AMGN shares on Wednesday morning.

Comments

[Vinz Klortho:]

Two problems with your analysis:

1) Amgen's future revenues will not be as predictable as they have been in the past.

2) P/E ratios for the markets are very high compared to historical levels. Due to the recession and the deflationary credit crisis, P/E ratios are headed down from the 20's to something more like 8-12.

Either way, Amgen is not the screaming buy you imply that it is.

Vinz

2008 Mar 20 03:39 PM

[mkreisel:]

What significant drugs does AMGN have in its pipeline?

2008 Mar 20 07:26 PM

[User 17829:]

AMGNS FUTURE EARNINGS ARE VERY MUCH IN DOUBT
AS IS THE P/E
AMGN TODAY IS NOT THE SLAM DUNK IY WAS YESTERDAY

JTKSR1

2008 Mar 20 08:19 PM

[E Nuff Sed:]

I agree amgn is undervalued by any measure. It has massive free cash flows and a lot of cash (& equivalents) on the balance sheet. The low valuation is likely to attract predetors (i.e. Pfizer) which is sitting on a lot of cash as well.

2008 Mar 21 02:05 PM

[User 166746:]

Have you read any of the news lately on Amgen's top drugs? Billions of dollars of Aranesp sales are now at risk due to gov't restrictions on use of the drug. It will only get worse for Amgen before it gets any better. mark my words, this is definitely a company not to invest in anytime soon.

2008 Mar 21 08:34 PM

[chip:]

Amgen is a very well run and conservative company but reality is market sentiment is against them now due to safety concerns about Epo, and that is one of their main revenue drivers. I believe they will see the 20s before the 60s.

2008 Mar 22 12:18 PM

[MelYes:]

Value Line indicates Amgen's net earnings per share of $3.30 In 2007 and projected earnings of $3.60 in 2008 WITH ZERO DIVIDENDS !
Amgen share price is not going to move up unless they start paying some reasonable dividends of at least $1.50 per share.

2008 Mar 28 02:45 PM