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, then decide if 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.
  • Money-making 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% 1.8% Fail
  1-Year Revenue Growth > 12% 3.5% Fail
Margins Gross Margin > 35% 84.9% Pass
  Net Margin > 15% 23.6% Pass
Balance Sheet Debt to Equity < 50% 112.6% Fail
  Current Ratio > 1.3 4.80 Pass
Opportunities Return on Equity > 15% 17.1% Pass
Valuation Normalized P/E < 20 19.87 Pass
Dividends Current Yield > 2% 2.1% 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 Dec. 2011. Total score = number of passes.

Since we looked at Amgen last year, the biotech giant has picked up a point. The company's landmark decision to start paying a dividend pushed its score up, and it's a great sign of strength for shareholders.

Once upon a time, biotech companies were all tiny startups. But over time, the cream of the crop has risen to take its place among the top health-care stocks in the market. Gilead Sciences (Nasdaq: GILD  ) has ridden the demand for HIV and hepatitis drugs to huge gains in recent years, and its move into the cancer field could ignite a second stage of growth. Both Gilead and Amgen have turned into huge cash cows.

But Amgen is so big that it has started returning money to shareholders the old-fashioned way: through dividends. It's something that other companies aren't doing, as they instead focus on big acquisitions. Gilead, for instance, picked up fellow hep C company Pharmasset earlier this month, using up a whopping $11 billion in the process. Celgene (Nasdaq: CELG  ) , which some have seen as a potential takeover target itself, bought privately held Avila Therapeutics at the much cheaper price of $350 million upfront plus another $575 million in potential milestone payments tied to drug success.

Still, Amgen hasn't been afraid to join the acquisition party. Last week, it agreed to buy Micromet (Nasdaq: MITI  ) for $1.16 billion, which should help the company expand its cancer focus somewhat.

Amgen will find it hard to restart its growth engines enough to get back to fast growth. But paying a dividend is a step in the right direction, showing that Amgen has reached full maturity as a lasting player in the health-care space.

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.

If you like promising stocks like Amgen, take a look at the Fool's latest special report (it's absolutely free!) to get some more good stock ideas. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

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. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. 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.


Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On February 02, 2012, at 10:26 AM, biotech101invest wrote:

    I like CELG better - 16 target raises after last weeks earnings and its MUCH cheaper on a PEG basis than AMGN with a much better pipeline and near term regulatory catalysts and 25 Phase 3 trials.

    CELG is an undervalued stock despite the recent run. CELG is definitely the best bet imo. WHY? It has the best EPS growth rate in the ENTIRE S&P 500 - not just biotech and lightyears ahead of other big biotech companies like BIIB & AMGN and yet its PEG ratio is so low - you are right - it could easily be taken out because the EPS growth and the pipeline have ZERO value in the current price and the deal would be accretive even at a big premium. BIIB missed 2012 ests with their guidance today-blamed R&D. CELG has 25 phase 3s & crushed guidance on high end by 30 cents. CELG PEG this yr 0.6 vs BIIB 1.3. 2014 PEG for CELG is 0,4 & for BIIB its 1.0. AMGN PEG 1.2 for 2012 and 1.0 in 2014. CELG's valuation still does not include anything for its EPS growth or its pipeline.

    CELG is now a rare stock that is a growth stock, a momentum stock and is now also a value stock trading at < 1/2 real 2010-2011-2012 EPS growth rate. Key is 20-30 cent beat of consensus has a # of conservative assumptions assures $5.00 EPS, 32% growth trading @ 14 CURRENT YR PE. Can't last.

    CELG PEG (P/E to earnings growth rate) was kept down over the last year because of the bogus side effect issue which is just about gone now. What's amazing about 30 cent beat on the high end of consensus - is that it has a series of very conservative assumptions...

    o Stable share o/s count. In my opinion they will buy back at least $1 billion to $1.5 billion of stock this yr - depending on the timing that could add 20 cents to actual EPS.

    o Generic Vidaza is assumed to start July 1. I once again do not believe there will be generic Vidaza all yr. Not in the bag but could add another 10 cents.

    o Revlimid estimate is at least $200 million low in my opinion. Could be even higher if we get full EU approval and if China sales start in Q4 and if Turkey, Mexico, Brazil, Russia, South Korea sales exceed like I think they will.

    o Tax rate is very conservative.

    o R&D spend is very conservative.

    o Possible Pomalidomide sales and China Revlimid sales in Q4.

    So in my opinion this is an EASY $5.00+ EPS this yr. That's a 32% growth rate trading at a 14 PE on CURRENT YR (and most people look to next yr for PE in PEG). With SPM lifted we should gravitate to AT LEAST a .75 PEG (vs industry standard 1.0) and that would put us at a 24 PE. I think we get there if we get full EU approval. In the meantime my goal is a 20 PE in the first half - which will be possible if we get any of the following:

    1) Overall Survival benefit update in the MM015 trial.

    2) Overall Survival benefit update in the IFM trial.

    3) Halt of the Phase 3 Abraxane Pancreatic Cancer for staggering efficacy which I expect in the first half ahead of expectations.

    4) Halt of the MM020 huge front line Rev-Dex international Ph 3 trial.

    5) Positive Apremilast update in Psoriatic Arthritis or Psoriasis.

    So I think it happens - we can get back to a 20 PE - which is low given our growth rate. Here is where the stock could go if I am right based on a 20 PE and even a 17.5 PE....

    20 PE:

    $4.70-$4.80 current low guidance with stable shr count and other conservative assumptions would bring us to $94 to $96. This could happen if we get full EU approval imo in the first half.

    My $5.00 EPS actual est would bring us to $100. Full EU approval and 1-2 of the other catalysts above and this is achievable IMO by yr end. Michael King's $102 target by yr end is looking more and more possible with a couple of positive catalyst hits.

    17.5 PE:

    $4.70-$4.80 current low guidance with stable shr count and other conservative assumptions would bring us to $82 to $84. This could happen earlier than people think IMO even in Q1.

    My $5.00 EPS actual est would bring us to $87.50. After maybe two beat and raise qtrs this could happen in the summer in my opinion if we hit a few of the catalysts above.

    And if we get most of the catalysts than my 24 PE is not out of the question:

    24 PE:

    $4.70-$4.80 current low guidance with stable shr count and other conservative assumptions would bring us to $112 to $115. This could happen if we get full EU approval, Pancr Cancer halt and good Apremilast data.

    My $5.00 EPS actual est would bring us to $120. A longshot yes but not impossible IF we get almost all of the catalysts above.

  • Report this Comment On February 02, 2012, at 11:04 AM, GW1000 wrote:

    biotech101invest I hope you are right about Celgene. I am a few points away from doubling my investment.

  • Report this Comment On February 02, 2012, at 2:30 PM, biotech101invest wrote:

    I think it continues higher - its earnings growth is at a deep discount vs BIIB or AMGN - so simply rolling to 2012 gets it higher because growth has not been prepaid. 25 phase 3s and earnings gowth is not priced in current price. China Revlimid approval, EU front line/maintenance approval, Apremilast data, MM015 data coming in NEJM and Stem Cell in Crohns later this yr.

    Also Celgene has 10 possible separate and distinct billion dollar a yr opportunities not in current stock price/mkt cap.......

    1) Pomalidomide,

    2) Front Line/Maintenance in EU

    3) Front Line/Maintenance in Asia

    4) Revlimid/Vidaza in China (Merck will have 25% of total revenue from China in 2 yrs) Celgene already profitable in China on Abraxane

    5) Abraxane if Pancreatic Cancer trial halts in 2012 (likely)

    6) Apremilast in Psoriatic Arthritis/Psoriasis

    7) Apremilast in Ankylosing Spondylitis

    8) Apremilast in Rheumatoid Arthritis

    9) Revlimid in NHL/CLL

    10) Revlimid in combination with MAB drugs like Rituxan and Erbitux in many, many indications. Revlimid works in the micro-environment and differently than Rituxan but somehow also increases Rituxan efficacy and also helps Rituxan work again when Revlimid is added after patients fail Rituxan

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