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If you're like me, you may have some doubts about this market. Political wrangling has sent stocks down. In truth, the market needed a break, as the S&P 500 had spent 227 trading days without a 5% correction until this week.
I don't mind corrections because they provide an opportunity to pick up some good values. There haven't been an awful lot of bargains in the market in 2021, though you can find them if you look hard enough (see my recent article about National Health Investors).
One thing I can say with certainty about market corrections: they're time to go shopping for quality stocks. Hopefully, you have some funds stashed away to take advantage of volatility or can raise some funds from your other holdings.
With this article, I'm back in the bargain bin. We're going to look at a firm that has been thrown in the dumpster for no reason - and that is our opportunity.
Amgen Inc. (NASDAQ:AMGN) is a good value right now. It doesn't have to fall any further to be a bargain - it is one right now. That doesn't mean it won't necessarily become a better value, as the market can be funny that way. But I will show below why I think value investors should be interested in Amgen and consider picking some up.
I'm sure everyone knows what Amgen does, but just for completeness, Amgen describes itself as "one of the world’s leading biotechnology companies" that focuses on "six therapeutic areas: cardiovascular disease, oncology, bone health, neuroscience, nephrology, and inflammation."
As usual, let's begin our analysis with a review of Amgen's recent financial metrics.
Amgen Produces Solid Growth and Earnings
A company's five-year history is usually the starting point for our analysis. This may seem like a dry and wonky section of my articles, but actually reviewing the numbers usually tells us a lot about the company and pinpoints areas that may not be obvious at first.
There's a common phrase used on this site, "value matters." I don't disagree, though I think an obsession with "value" can be self-defeating. Let me just tweak that phrase a little bit and say that the numbers matter.
| AMT | Total Revenues | Diluted Earnings/ Share | Net Income | EBITDA | Net Debt | Shares Outstanding |
|---|---|---|---|---|---|---|
| 2016 | 22,991.0 | $10.24 | 7,722.0 | 11,937.0 | (3,489.0) | 738.2 |
| 2017 | 22,849.0 | $2.69 | 1,979.0 | 12,244.0 | (6,336.0) | 722.2 |
| 2018 | 23,747.0 | $12.62 | 8,394.0 | 12,481.0 | 4,625.0 | 629.6 |
| 2019 | 23,362.0 | $12.88 | 7,842.0 | 11,756.0 | 21,520.0 | 591.4 |
| 2020 | 25,424.0 | $12.31 | 7,264.0 | 12,768.0 | 22,798.0 | 578.3 |
| TTM | 25,484.0 | $9.86 | 5,746.0 | 12,421.0 | 24,700.0 | 569.6 |
TTM is Trailing Twelve Months as of June 30, 2021. Total Revenues, Net Income, Total Assets, FFO, and Net Debt in $millions. Shares Outstanding in millions. Shares Outstanding TTM is the most recent report as of 30 June 2021. Source: Seeking Alpha.
Amgen's five-year financials show some interesting trends that you don't always see. Total Revenues and EBITDA have been up a bit over the past five years, though nothing spectacular.
Net Income and Diluted Earnings per Share, on the other hand, are down a bit, but this hardly strikes me as a company that is having any trouble generating healthy earnings. Most other companies would love to give their shareholders $9.86 per share in earnings. The overall earnings per share is up, save for the last twelve months which we can chalk up to the pandemic.
To me, the most interesting columns are the last to, Net Debt and Total Common Shares Outstanding. Amgen has been reducing its share count steadily. To me, that's an excellent sign of a healthy company. It's very shareholder-friendly and the reason why the earnings per share have held up so well despite declining income.
Net Debt hasn't gone up very much over the past three years, certainly nothing to worry about. When it comes to a company's debt, I defer to the credit rating agencies whose job it is to make decisions on the ability to pay. Moody's gives Amgen a Baa1, which is an investment grade with moderate credit risk. Fitch has Amgen at BBB+, which is similar. S&P Global Ratings gives Amgen a score of A-, which indicates strong credit.
All of the rating agencies have Amgen as a stable outlook. Overall, Amgen is not over-leveraged and a good bet to pay its obligations.
Okay, next let's look at the most recent quarters and see what they tell us.
| AMGN | Total Revenues | Net Income | Diluted EPS | EBITDA | Gross Profit | Revenue per Share |
|---|---|---|---|---|---|---|
| Q1 2020 | 6,161.0 | 1,825.0 | $3.07 | 3,252.0 | 4,648.0 | $10.44 |
| Q2 2020 | 6,206.0 | 1,803.0 | $3.05 | 3,253.0 | 4,718.0 | $10.55 |
| Q3 2020 | 6,423.0 | 2,021.0 | $3.43 | 3,354.0 | 4,862.0 | $10.98 |
| Q4 2020 | 6,634.0 | 1,615.0 | $2.76 | 2,747.0 | 5,037.0 | $11.42 |
| Q1 2021 | 5,901.0 | 1,646.0 | $2.83 | 2,970.0 | 4,411.0 | $10.23 |
| Q2 2021 | 6,526.0 | 464.0 | $0.81 | 3,188.0 | 4,889.0 | $11.39 |
All Totals in $millions except Diluted EPS. Source: Seeking Alpha.
Total Revenues, Gross Profit, EBITDA, and Revenues per Share all look healthy. They show a strong company without any problems selling its products and with a stable customer base. Product sales growth continued strong through the second quarter of 2021.
The Net Income and Diluted Earnings per Share columns, though, do stand out. After a long period of stability - much longer than just the years I included here - both took a hit in the latest quarter.
That's likely why the stock has struggled recently. The question becomes, is this some fundamental shift in the business that makes Amgen a wounded pigeon?
Digging deep into the numbers, it appears that one series of numbers is responsible for the big drop-off in the latest quarter: EBT, Including Unusual Items. Just for clarity, I'll include the same series of numbers here.
| AMGN | EBT, Including Unusual Items |
|---|---|
| Q1 2020 | 2,020.0 |
| Q2 2020 | 2,030.0 |
| Q3 2020 | 2,206.0 |
| Q4 2020 | 1,877.0 |
| Q1 2021 | 1,857.0 |
| Q2 2021 | 558.0 |
Amgen financials 2020-2021. Source: Seeking Alpha.
The Q2 2021 number showed a steep, unusual drop-off. When you see a big drop-off like that, it kind of catches your attention. Everything else looks pretty normal, but something was up with "unusual items" during the second quarter of 2021.
Reviewing the second-quarter conference call transcript didn't inform me specifically of what caused this shortfall. However, two likely causes were "plans to invest approximately $1 billion to build two new manufacturing facilities, one in North Carolina and the other in Ohio," and "approximately $200 million of operating expenses related to the Rodeo, Five Prime, and Teneobio acquisitions."
The company obliquely addressed this during the call:
We expect our Q3 and Q4 non-GAAP other income and expense to be more in range with our Q1 and expect full-year net expense in the range of 1.3 billion to 1.5 billion.
In other words, the company doesn't seem too worried about it and, whatever the cause of the surge in "unusual items," things should return to normal by the third quarter.
One thing about "unusual items," whatever the source, is that they're usually, er, unusual. Meaning, they won't repeat every quarter. Unless there is some systemic problem that will impact earnings going forward, I think we can regard the issues with Net Income and Diluted EPS as transient. This appears to be a "blip." So, I'm not worried about a single quarter of "unusual items."
But I think we've found why Amgen is on sale.
Why You Should Consider Buying Amgen Now
Amgen is a good value right now following a lengthy period of consolidation as the pandemic has ground on. While it usually tracks the S&P 500 and did fairly well early in the 2020 stress test, the past year has seen it fall behind. Amgen's total return is now at its lowest levels since the height of the pandemic market crash.
So, we are dumpster-diving here, looking for a gem among the market's discards. Given Amgen's quality over the years, this could be a lucky find. But just because its performance has lagged doesn't mean it's a buy, maybe a swan has turned into a turkey.
However, the ten-year price-to-sales chart shown above seems to suggest we're just getting a swan on sale. Notice how the ratio is just about as low as it has been since 2015. Every single previous time that the price-to-sales figure has gotten this low, below 5, Amgen has been a buy. A good rule of thumb is that anytime a quality stock gets below 5 by this measure, you should put it on your watch list.
Amgen's current price-to-cash-flow ratio isn't quite as appealing, but it is still lower now than it has been over much of the past year, roughly average for where it has been over the past ten years.
Amgen currently yields about 3.3%, which is fairly appealing for such a solid company. Its payout ratio is a slim 42.92%, which is very conservative. Its Dividend Yield to Dividend Payout Ratio (TTM) is only 7.60%, which is far better than the sector median. Seeking Alpha gives it a Dividend Safety Grade of A.
With a 12.67% 5 Year Dividend Growth Rate and dividend growth in each of the past nine years, I would be shocked if it did not raise the dividend again in December.
One of the nice things about Amgen is that it is a power player in the biotech world. It is not dependent on one drug and does not have to worry about any particular drug losing patent protection. The company has a multitude of strong sellers and a very strong drug pipeline that should continue to propel earnings:
Now, turning to the outlook for the business for 2021. we are excited by our pipeline. This innovation is augmented and balanced by the business development that we have announced this year. Based on underlying market dynamics and our investment plans, we are reaffirming our 2021 revenue guidance range of 25.8 billion to 26.6 billion.
As mentioned above when we looked at the five-year financials, Amgen's share count has been declining. One of the ways that Amgen rewards shareholders is through a vigorous share buyback program. As said during the conference call:
We expect share repurchases for 2021 to be in the upper range of $3 billion to $5 billion.
Obviously, Amgen is not in any financial trouble if it can afford to repurchase $5 billion of its stock in one year.
Amgen has good growth prospects abroad.
Amgen is preparing new strategies for a pandemic world. One of these is digitization, which Amgen recently discussed at the Cantor Global Healthcare 2021 Conference. However, as discussed at that conference, "you are seeing an increase in being able to visit physicians in the office." Things are slowly getting back to normal, which is good news.
In August, UBS touted Amgen as one of its twenty top stocks with yields over 2%. The stock has fallen a bit since then and now presents as an even better value.
Amgen is trading at a low valuation by historical standards, pays a decent and rising dividend with a conservative payout ratio along with massive share buybacks, and has a strong product pipeline that should ensure continued solid earnings for the foreseeable future. Those are the hallmarks of a good income stock.
Why You Should Be Cautious About Amgen
As I write this, Congress is working on some bills that seem to be aimed at companies like Amgen. For instance, the House Judiciary Committee moved forward with H.R. 2884, the Affordable Prescriptions for Patients Through Improvements to Patent Litigation Act. This limits the number of patents a drugmaker can challenge and would result in the number of biosimilar drugs.
Amgen aggressively protects its patents. It recently won a case to protect its psoriasis drug Otezla (Amgen expects approval of that drug sometime in 2021 for treatment of mild-to-moderate cases). H.R. 2884 could chill Amgen's ability to protect its products.
I think this bill has a good chance of becoming law because it has bipartisan support. There are other potential laws currently in the legislative process, including a provision in one of the infrastructure bills that would cap any rise in the price of some drugs at the inflation rate. This is a controversial provision that doesn't even have unanimous Democrat support, but it very easily could become law. There also are other ideas in the works to control prescription drug prices.
The big drug companies are easy and continuing targets politically, as everyone would like to see drug prices lower. While I hardly see this as an existential threat to Amgen, being used as a political punching bag could turn into a drag on profits.
All of this has been a drag on Amgen's stock price for some time. Odds are good that politicians will continue to demonize the big drug companies for political gain. That's just a fact of life, but the fact is that we all want better prescription drugs to treat our ailments and there's only so much politicians can do without seriously harming the product pipeline.
There is a substantial debt load on Amgen. Total Debt/Equity (TTM) is 397.50%, while Total Debt/Capital (TTM) is 79.90%. As noted above, the credit rating agencies don't see any problems with that, but management does run the risk of becoming a bit too ambitious with its expansion plans.
Amgen has a steadily rising price-to-book ratio. While it is lower than it was recently, the price-to-book ratio that some conservative investors feel strongly about is still high at about 15. It is roughly on the trend for Amgen's typical book value.
The main reason to be cautious about Amgen, though, is simply that it is out of favor with the market. It has blown past some previous support levels and seems to be hanging in mid-air.
Amgen has fallen far below its 200-day moving average, which it usually tracks pretty closely. The only good support level is at $200, which has offered support and resistance in the past. That is the likely downside in the short term. My expectation is that Amgen's stock once again will meet that 200-day moving average and cross it to the upside as it usually does.
However, on the positive side, the chart shows that Amgen has a long history of spikes down followed quickly by spikes back up. We're seeing the spike down right now, the only question is when we'll see the spike back up. I have a feeling we won't have to wait very long. These types of stocks that have a zig-zag pattern are usually good bets to repeat that pattern. If Amgen follows its usual pattern, we are at the bottom of the zig and should see a zag back up.
Just because Amgen's stock is down, does not mean it will automatically bounce back up. While it always has in the past, that is no guarantee and you could still see some more pain.
As I've written before, to be a good value investor you have to be miserable at times, and this is one of those times as Amgen is down but has not yet started a move back up.
Conclusion
Amgen is a big, comfortably profitable biotech firm that has a long history of paying a decent dividend and making share buybacks that benefit shareholders. The stock price is down in the dumps right now, and very possibly could fall a bit further. That could happen if, for instance, certain political thrusts at the biotech industry succeed.
However, overall, I think that Amgen is a terrific value right now. By some measures, it sits at a level that suggests its stock price should bounce back quickly. With a quality company like Amgen, your biggest concern is simply getting in at the best price that you can. The current price is pretty good relative to recent history. The company is paying you a healthy, growing dividend while you wait for good news on the stock's price front. I am bullish on Amgen and think that it will be back above $240 from its current $213 before too long.
