Has Amgen Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Amgen (NASDAQ: AMGN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

3.2%

Fail

 

1-year revenue growth > 12%

10.8%

Fail

Margins

Gross margin > 35%

84.1%

Pass

 

Net margin > 15%

25.2%

Pass

Balance sheet

Debt to equity < 50%

139.2%

Fail

 

Current ratio > 1.3

3.85

Pass

Opportunities

Return on equity > 15%

22.8%

Pass

Valuation

Normalized P/E < 20

19.52

Pass

Dividends

Current yield > 2%

2.2%

Pass

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

6 out of 9

Source: S&P Capital IQ. NM = not meaningful; Amgen declared its first dividend in December 2011. Total score = number of passes.

Since we looked at Amgen last year, the company has held onto the point it gained from 2011 to 2012. The stock has done quite well, rising nearly 30% over the past year.

As a giant in the industry, Amgen has pioneered biotechnology, with drug development that has covered a huge variety of different ailments. From cancer to arthritis and psoriasis, Amgen has focused its attention on areas where demographic trends favor continued growth in the coming years.

But more recently, Amgen has had mixed results from its established stable of treatments. Biosimilar competition outside the U.S. has held back sales growth for its Neulasta/Neupogen treatment for chemotherapy side effects, and with Teva Pharmaceutical (NYSE: TEVA  ) launching a biosimilar this November, U.S. sales will probably take a hit as well. Anemia drugs Aranesp and Epogen have suffered sales declines even though Affymax's (NASDAQOTH: AFFY  ) Omontys hasn't yet made a big impact in the market. Still, revenue from anti-inflammatory Enbrel jumped 23% in its most recent quarter, and some of its less well-known drugs posted strong sales gains as well.

For future growth, Amgen has a pipeline of promising drugs in development. But its recent acquisition of deCODE Genetics signals a possible move into the trend toward personalized medicines, with analysis of patients' genetic code allowing Amgen to tailor its drugs not just to certain diseases but also to particular subgroups of patients with those diseases. Amgen also expanded last week on plans to develop biosimilar drugs, planning to go up against AbbVie's (NYSE: ABBV  ) Humira and other major blockbuster treatments.

For Amgen to improve, it needs to keep finding ways to ratchet up growth and continue boosting its new dividend. With so much potential, though, Amgen should have plenty of chances to get closer to perfection in the near future.

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.

Find out more about the new AbbVie and how it poses a competitive threat to Amgen by reading our premium report on the newly spun-off drug company. Inside, you'll find answers on whether AbbVie has more growth potential as an independent company than it did before the spinoff. Simply click here now to claim your copy today.

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


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