Is Amgen the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Amgen (Nasdaq: AMGN  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Amgen.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.5% Fail
  1-Year Revenue Growth > 12% 3% Fail
Margins Gross Margin > 35% 85.5% Pass
  Net Margin > 15% 30.2% Pass
Balance Sheet Debt to Equity < 50% 55.2% Fail
  Current Ratio > 1.3 3.66 Pass
Opportunities Return on Equity > 15% 19.3% Pass
Valuation Normalized P/E < 20 16.11 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 5, Amgen falls right in the middle of our range. The biotech giant isn't like smaller peers whose fortunes are made or broken on the back of one potential blockbuster, but it can still benefit from big successes.

Amgen has a nice suite of products that produce big revenues. Four of its drugs were responsible for more than 90% of the company's $10.9 billion in total worldwide product sales during the first nine months of 2010. But those drugs have matured and held back growth for the company as a whole.

But as Fool biotech expert Brian Orelli sees it, the future of Amgen relies on the drug denosumab. It's sold under the brand name Prolia for treating osteoporosis, but its potential for preventing bone breaks in cancer patients could improve sales dramatically. In a trial, the drug compared favorably against Novartis' (NYSE: NVS  ) Zometa.

Among its main competitors, Amgen doesn't really stand out. Celgene (Nasdaq: CELG  ) has much higher growth, although its shares are also more richly valued. Gilead Sciences (Nasdaq: GILD  ) also has larger growth rates but without the higher price tag; its shares actually carry a lower earnings multiple than Amgen. Even Genzyme (Nasdaq: GENZ  ) and Biogen Idec (Nasdaq: BIIB  ) have outpaced the slow revenue growth that Amgen has suffered through in recent years.

For now, Amgen is a reasonably acceptable stock, even if it falls short of perfection. If it can continue its past success with future drug development, though, it should reward investors quite handsomely.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Amgen to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Gilead Sciences is a Motley Fool Stock Advisor recommendation. Novartis is a Motley Fool Global Gains pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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4/17/2014 3:59 PM
AMGN $115.46 Down -0.08 -0.07%
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