Is Amgen Broken?

| About: Amgen Inc. (AMGN)

Summary

Biotech stocks have been in a conundrum for about the past year with the iShares NASDAQ Biotechnology ETF down 26.8%.

There is one stock that I am not losing confidence in, and that is Amgen.

The company has nearly $75B in total assets and if you do the math half of it is in cash.

The company has also been averaging nearly $2B in free cash flow for the past five quarters.

Biotech stocks have been in a conundrum for about the past year with the iShares NASDAQ Biotechnology ETF (NASDAQ:IBB) down 26.8% since that time and down 19.9% since we turned the calendar to 2016. If you look over the life of IBB you'll see that in its entire history it has only really experienced a downturn such as the one suffered over the past year once, back in early 2002. You'll see that from the chart it was nearly flat for about a decade before taking flight in late 2010.

It is safe to say that confidence in the industry is waning due to drug pricing issues, uncertainty about the healthcare policies of the next president, and no real breakthrough data recently from drugs going through clinical trials. A friend of mine started up his own biotech company recently and is in the process of doing second round funding, but can't find a lead investor. The appetite for risk is just not in the industry right now. Investors are beginning to lose confidence in the Biogen's (NASDAQ:BIIB), Gilead's (NASDAQ:GILD), and Allergan's (NYSE:AGN) of this world, but there is one stock that I am not losing confidence in, and that is Amgen (NASDAQ:AMGN).

With nearly $34.7B in total cash the company is flush with money (please see balance sheet below). In fact, the company has nearly $75B in total assets and if you do the math half of it is in cash. As an investor I would like to see the company utilize that cash through making a purchase, paying down debt, or larger dividend boosts. Currently the company has nearly $34B of total debt on its balance sheet so that doesn't bother me right now because it has more than enough cash to pay the debt.

The most attractive thing about the company's large cash position is that it gives it the dry powder required to make a large acquisition when the time is right. The fact that the total debt on the balance sheet is roughly equal to the entire cash position doesn't bother me because all I'm concerned about is that the short-term obligations are paid off in time. The company doesn't necessarily need to pay all $34B at once so the only portion that really matters is the short-term obligations which equal to about $2.2B.

AMGEN INC BALANCE SHEET

Fiscal year ends in December. USD in millions except per share data.

2015-03

2015-06

2015-09

2015-12

2016-03

Assets

Current assets

Cash

Cash and cash equivalents

$2,864

$3,795

$3,226

$4,144

$2,896

Short-term investments

$24,254

$26,198

$27,894

$27,238

$31,844

Total cash

$27,118

$29,993

$31,120

$31,382

$34,740

Receivables

$2,548

$2,779

$2,901

$2,995

$3,078

Inventories

$2,686

$2,567

$2,531

$2,435

$2,572

Other current assets

$2,712

$2,397

$2,292

$1,706

$1,816

Total current assets

$35,064

$37,736

$38,844

$38,518

$42,206

Non-current assets

Property, plant and equipment

Gross property, plant and equipment

$12,172

Accumulated Depreciation

-$7,265

Net property, plant and equipment

$5,123

$5,050

$4,988

$4,907

$4,885

Goodwill

$14,721

$14,723

$14,674

$14,787

$14,804

Intangible assets

$12,265

$11,988

$11,613

$11,641

$11,448

Other long-term assets

$1,779

$1,712

$1,750

$1,723

$1,773

Total non-current assets

$33,888

$33,473

$33,025

$33,058

$32,910

Total assets

$68,952

$71,209

$71,869

$71,576

$75,116

Liabilities and stockholders' equity

Liabilities

Current liabilities

Short-term debt

$500

$1,250

$1,250

$2,250

$2,247

Accounts payable

$888

$934

$1,067

$965

$818

Accrued liabilities

$4,948

$4,707

$4,848

$4,698

$5,458

Other current liabilities

$754

Total current liabilities

$6,336

$6,891

$7,165

$8,667

$8,523

Non-current liabilities

Long-term debt

$29,841

$30,702

$30,511

$29,306

$32,060

Deferred taxes liabilities

$3,330

$3,227

$3,109

$2,239

$2,202

Other long-term liabilities

$2,939

$2,905

$3,117

$3,281

$3,649

Total non-current liabilities

$36,110

$36,834

$36,737

$34,826

$37,911

Total liabilities

$42,446

$43,725

$43,902

$43,493

$46,434

Stockholders' equity

Common stock

$30,420

$30,464

$30,556

$30,649

$30,588

Retained earnings

-$4,051

-$2,912

-$2,352

-$2,086

-$1,638

Accumulated other comprehensive income

$137

-$68

-$237

-$480

-$268

Total stockholders' equity

$26,506

$27,484

$27,967

$28,083

$28,682

Total liabilities and stockholders' equity

$68,952

$71,209

$71,869

$71,576

$75,116

The company has also been averaging nearly $2B in free cash flow for the past five quarters (please see cash flow statement below). With short-term debt standing at $2.2B it should be very easy for the company to manage its debt just with the free cash flow it generates.

AMGEN INC Statement of CASH FLOW

Fiscal year ends in December. USD in millions except per share data.

2015-03

2015-06

2015-09

2015-12

2016-03

TTM

Cash Flows From Operating Activities

Net income

$1,623

$1,653

$1,863

$1,800

$1,900

$7,216

Depreciation & amortization

$524

$519

$523

$542

$521

$2,105

Deferred income taxes

-$125

-$356

-$68

-$630

Stock based compensation

$70

$90

$82

$80

$52

$304

Accounts receivable

-$9

-$190

-$103

-$118

-$98

-$509

Inventory

$51

$145

$88

$197

-$133

$297

Accounts payable

-$312

$43

$142

$115

-$150

$55

Income taxes payable

$85

$284

$109

$31

-$6

$418

Other working capital

-$462

$383

$288

-$53

-$238

$475

Other non-cash items

-$241

-$113

$7

-$178

$135

-$221

Net cash provided by operating activities

$1,329

$2,814

$2,874

$2,060

$1,915

$9,510

Cash Flows From Investing Activities

Investments in property, plant, and equipment

-$118

-$133

-$138

-$205

-$156

-$632

Property, plant, and equipment reductions

$45

$3

Acquisitions, net

-$359

Purchases of investments

-$6,931

-$6,599

-$6,262

-$6,185

-$8,595

-$27,641

Sales/Maturities of investments

$6,200

$4,321

$4,442

$6,593

$4,356

$19,712

Other investing activities

-$103

$52

-$90

-$80

$5

-$424

Net cash used for investing activities

-$952

-$2,359

-$2,003

-$233

-$4,390

-$8,985

Cash Flows From Financing Activities

Debt issued

$1

$2,909

$6,374

Debt repayment

-$125

-$2,025

-$125

-$125

-$125

-$2,400

Common stock issued

$18

$34

$13

$17

Common stock repurchased

-$464

-$476

-$744

-$183

-$676

-$2,079

Dividend paid

-$599

-$602

-$599

-$596

-$752

-$2,549

Other financing activities

-$74

$3,545

$15

-$23

-$129

$161

Net cash provided by (used for) financing activities

-$1,244

$476

-$1,440

-$909

$1,227

-$493

Net change in cash

-$867

$931

-$569

$918

-$1,248

$32

Cash at beginning of period

$3,731

$2,864

$3,795

$3,226

$4,144

$2,864

Cash at end of period

$2,864

$3,795

$3,226

$4,144

$2,896

$2,896

Free Cash Flow

Operating cash flow

$1,329

$2,814

$2,874

$2,060

$1,915

$9,510

Capital expenditure

-$118

-$133

-$193

-$205

-$156

-$687

Free cash flow

$1,211

$2,681

$2,681

$1,855

$1,759

$8,823

My hope is that with this outstanding balance sheet Amgen can turn its stock price around by utilizing its cash somehow. It is because of the company's strong balance sheet and great cash flow that I took a bullish stance on the company recently. With a beta of 0.82 it trades more like a consumer staple name than a high flying biotech, which is why I decided to write some options in the name. I believe that is a relatively defensive name with a lot of offense within an aggressive cohort. What I mean by this statement is that the healthcare industry is typically a volatile industry but in the ends acts defensive in nature behaving in a way that provides investors some sort of shield from a market bust, and in particular I believe Amgen provides a lot of fire power or offense because of its large cash position which it can deploy whichever way it so pleases.

So now that I've painted a rosy picture by using the balance sheet and cash flow statements I bet you are wondering what my trade is. For starters, I am long the stock. Not only am I long the stock, but I also looked out into August and wrote the $150 strike put to collect some premium. Then when I thought about it some more and seeing that it is summer time trading is not going to be very active with investors on vacation and all so I decided to write the August $160 call too. Granted the stock is at $161 right now I believe it should come back down in the range shortly because the stock market has been moving up on no real news lately. In a world with no yield this to me seems to be a great place to generate some cash.

Amgen is the company in the industry with the most cash, a low beta, and strong product portfolio. The stock is trading at an inexpensive forward multiple at just 13.2x next year's earnings estimates, making it the third lowest among its peers in the S&P 500. I just don't believe that within the next month the stock will plummet even if my options strategy does cover the second quarter earnings call slated for July 28 th. The 52-week low in the name is at $130, or 19.3% lower from here and with the stock near 12% of its high I think it can just meander around the high $150 range at least for the summer. Effectively if the stock did drop 6.8% in the next month to my $150 put I would be buying it 15% above its 52-week low which is not bad for the premium I picked up in the name. Thank you for reading and I look forward to your comments.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long AMGN, GILD, AGN.

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.

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