Amgen Is Not Compelling At The Current Price

Summary

• AMGN's valuation is reasonable but the stock is not cheap.
• The Wall Street consensus rating is bullish but the stock is very close to the consensus 12-month price target.
• The market-implied outlook is neutral, with moderate volatility.
• There is high dispersion among the Wall Street analyst price targets.
• My overall rating is neutral.

Photo by Sundry Photography/iStock Editorial via Getty Images

Amgen (NASDAQ:AMGN) is a major pharmaceutical company, with a $142B market cap and $5.9B in revenue for Q1 2021 and expected revenue of $26B for the full year. The company faced substantial challenges in 2020, largely due to COVID and large numbers of missed patient visits which resulted in lower sales. The company owns a portfolio of brand name drugs, as well as growing its business in biosimilar and generic products.

AMGN reported Q1 2020 earnings on April 27th, missing the analysts' consensus estimates on both earnings and revenue. AMGN has missed consensus quarterly EPS only twice in the past four years. Following the miss, AMGN fell 9%, going from $255 on April 27th to $232 on April 29th. The stock is gradually recovering but has not regained the pre-announcement level.

Price history and basic statistics for AMGN (Source: Seeking Alpha)

The current valuation is reasonable, with forward P/E of 15.35 and dividend yield of 2.82%. The 3-5 year outlook for EPS growth is 8.34% per year, above AMGN's trailing 5-year average but well below the median for the healthcare sector. The trailing 5-year dividend growth rate is 14.25% per year.

Historical total returns for AMGN vs. the Drug Manufacturer sector and the U.S. equity market as a whole (Source: Morningstar)

AMGN has delivered competitive total returns over the past 15 years, beating the Drug Manufacturer sector for the 3-, 5-, 10-, and 15-year periods.

To formulate an opinion on AMGN, I consider the fundamentals and two forms of consensus outlooks. The first is the Wall Street analyst consensus rating and price target. The second is the market-implied outlook derived from options prices. While market-implied outlooks are unfamiliar to many investors, there is considerable research on this topic in quantitative finance.

In brief, the prices of options embody the market's consensus view of the probability that the price of a stock will rise above (call option) or fall below (put option) a certain level (the strike price) over a specific period (from today until the option expiration date).

By analyzing options at a range of strike prices and the same expiration date, it is possible to calculate the probability distribution of future returns that reconciles the options prices. Conceptually, this is similar to using options prices to calculate an implied volatility (such as the VIX), but the market-implied outlook is an estimation of the entire distribution of returns rather than just the volatility. For those who are unfamiliar with the concept, I have written an overview post that includes examples and links to relevant financial literature.

Wall Street Analyst Outlook

eTrade combines 19 ranked Wall Street analysts' ratings and 12-month price targets to calculate the consensus rating and price target. The consensus rating is bullish and the consensus 12-month price target is $243.69, 1.57% below the current price. The consensus rating has been consistently bullish over the last year, but the share price has been range-bound. There is a high level of dispersion among the analysts' price targets, ranging from $185 (25.3% below the current price) to $296 (19.6% above the current price). When there are high levels of dispersion among analyst price targets, the consensus has little or no predictive value.

Wall Street analyst consensus rating and 12-month price target for AMGN (Source: eTrade)

Seeking Alpha's calculation of the Wall Street consensus combines the views of 29 analysts, and arrives at the same overall view. The prevailing rating is bullish, and the price target is 1% above the current price.

Wall Street analyst consensus rating and price target for AMGN (Source: Seeking Alpha)

The Wall Street analysts have substantially varying outlooks for AMGN's 12-month price and the stock is currently very close to the consensus price target. This is a somewhat odd situation. One expects that a bullish outlook will correspond to substantial expected 12-month price appreciation except when the stock price has recently gone up substantially. Overall, I view the current outlook as neutral (even though the consensus rating is bullish) because the consensus outlook is that the stock is fully priced and the disagreement between the analysts is high.

Market-Implied Outlook

For this analysis, I have used call and put option prices at a range strikes and all expiring on January 21, 2022, to derive the market-implied outlook for AMGN's price return over the next 8.52 months (from now until January 21, 2022). I have chosen this expiration because it is the closest expiration date to the end of 2021. The standard presentation for the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal axis (going from most negative return on the far left to most positive return on the far right).

Market-implied price return probabilities for AMGN for the 8.5-month period from today until January 21, 2022 (Source: author's calculations using options quotes from eTrade)

The market-implied outlook is generally symmetric in terms of the probabilities of positive and negative returns of the same magnitude. The peak probability is very slightly tilted towards positive return (+1.87%) and the median return is -2%. The annualized volatility derived from this distribution (a form of implied volatility) is 26%. This is a moderate-to-low implied volatility for an individual stock. For comparison, I calculated the same volatility in my recent analysis of ABBV.

To make it easier to compare the relative probabilities of positive and negative returns, I rotate the negative return side of the probability distribution about the vertical axis (see below). The negative returns have slightly higher probability than the positive returns of the same magnitude (the red dashed line is consistently above the solid blue line). This tends to suggest an elevated chance of negative price returns, although the overall closeness of the probabilities of positive and negative returns corresponds to a neutral outlook.

Dividend-paying stocks tend to exhibit the slightly negative tilt observed here because dividends reduce the potential upside of a stock relative to the downside. In addition, the theory is that market-implied outlooks will tend to be biased somewhat to the negative if investors are risk-averse and willing to pay more than fair value for downside protection. Given these two factors, I interpret the market-implied outlook as solidly neutral.

Market-implied price return probabilities for AMGN for the 8.5-month period from today until January 21, 2022. Negative return side of the distribution has been rotated about the vertical axis (Source: author's calculations using options quotes from eTrade)

Summary

AMGN's valuation is reasonable but the stock is not particularly cheap (Seeking Alpha's quantitative value grade for AMGN is a B+). The Wall Street consensus rating is bullish, but the current price leaves little potential upside when compared to the 12-month price target. There is also high dispersion among the individual analyst's price targets which reduces confidence in the outlook.

The market-implied outlook is neutral, with an annualized volatility of 26%. This level of volatility is comparable to those derived for ABBV and GILD. In consideration of the fundamentals and the consensus outlooks, there is no compelling reason to buy but also no elevated downside. My final rating for AMGN is neutral.

Analyst’s Disclosure: I am/we are long ABBV. 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.