Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Amgen
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Amgen meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Amgen's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Amgen's earnings and free cash flow have grown pretty significantly.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
| Amgen | 54% | 19% | 19% |
|
Celgene |
21% | 19% | 1% |
|
Gilead Sciences |
62% | 42% | 30% |
|
Biogen Idec |
20% | 18% | 12% |
Source: Capital IQ, a division of Standard & Poor's.
Amgen tends to generate a moderately high return on equity while employing a moderate amount of debt.
3. Management
CEO Kevin Sharer has been at the job since 2000. Prior to that, he was chief operating officer for almost a decade and has worked at MCI and General Electric.
4. Business
Biotechnology is fairly susceptible to technological disruption, though it can help to maintain a diverse portfolio of products (Amgen has 10).
The Foolish conclusion
Regardless of whether Buffett would ever buy Amgen, we've learned that while the company operates in a fairly technologically intensive industry, it exhibits several of the other characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and tenured management.
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