Inside Wall Street: Amgen an undervalued giant

This biotech behemoth's appeal is its combined value-and-growth stock characteristics.

By Gene Marcial Feb 13, 2013 10:53AM
Pills SuperStockIt isn't surprising that Amgen (AMGN), the world's largest biotechnology company, is fast becoming a core stock in some of the big institutional investors' portfolios. The reason: It appeals to investors who are fascinated by growth-like stocks that trade at modest value-stock valuations.

One other interesting aspect of Amgen: While it's a biotech leader, it has all the makings and allure of a Big Pharma stock. As the giant in the biotech sector, Amgen's leading products include blockbuster drugs that dominate in big markets, similar to the major therapeutics that Big Pharma leaders such as Pfizer (PFE), Merck (MRK) and Eli Lilly (LLY) are known for.

Like the large drug makers, Amgen has manufacturing, distribution and sales facilities worldwide, producing some of the most successful and widely known drugs. They include Epogen, a hormone that stimulates production of red blood cells in bone marrows that has sales of nearly $2 billion in 2012; Neupogen, which helps produce white blood cells that are critical to fighting bacterial infection; and Enbrel, a treatment for rheumatoid arthritis and chronic plaque psoriasis.

"We are always looking to purchase shares in solid, growth companies selling at a reasonable price -- and Amgen fits the bill for us," says Joseph Hunt, a principal and chief strategist at Northwest Criterion Asset Management. Currently trading at a price-to-earnings ratio of 14, Amgen is selling way below the industry average of over 40 times earnings, he notes. And its major peers, such as Biogen (BIIB), Gilead (GILD) and Celgene (CELG), trade in the mid-20s.

On the other hand, Amgen's price-to-earnings ratio in the past five years ranged between nine and 15, "so we see good value in Amgen," says Hunt. He points out that Amgen raised recently its revenue and earnings estimates, and expects to earn at least $8 a share in 2015, if not sooner. "With that in mind, Amgen's price-to-earnings multiple should drop to 11 times," says Hunt.

The stock has been a super-achiever, currently trading at $84 a share, after hitting a 52-week high of $90 in 2012.  

Steven Silver, analyst at S&P Capital IQ, estimates Amgen will earn more than $7 a share this year on projected revenue of $17.96 billion, and $8 a share in 2014 on $18.3 billion in sales. Rating the stock a "buy," Silver says his bullish recommendation reflects "our positive outlook for Amgen to advance a robust late-stage pipeline to support a resilient, but largely mature legacy drug portfolio. He has a 12-month price target of $100 a share.

Adding to Amgen's appeal is its current dividend yield of 2.2%. Hunt of Northwestern Criterion says Amgen plans to return to shareholders more than 60% of its adjusted net income in the form of dividends and stock buybacks through 2015. The dividends were initiated in 2011, and Amgen raised them by 31% early this year.

Hunt notes that Amgen has achieved impressive growth even with its little presence in the vast Asian market. But now its strategic plan is to enter the markets in China in 2015 and Japan in 2016. Amgen will also focus on producing higher-margin products.

Amgen is a "value" stock but with excellent potential of becoming a real fast-growth company, argues Hunt. "Applying a multiple of 15 times his earnings estimate of $8 a share in the not-too-distant future, we are looking at a price target of $120 a share," says Hunt.

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Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.


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