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Will Celgene Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Celgene (NASDAQ: CELG  ) is a highly successful biotech company, standing out from hundreds of smaller peers with its large stable of highly successful drugs and therapies. But competition in the health-care space never goes away. How is Celgene standing up to its rivals? Let's revisit how Celgene does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

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

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$47.1 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

0.64

Pass

 

Worst loss in past five years no greater than 20%

0.7%*

Pass

Valuation

Normalized P/E < 18

39.81

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

NM

NM

       
 

Total score

 

5 out of 8

Source: S&P Capital IQ. NM = not meaningful; Celgene doesn't pay a dividend. Total score = number of passes. * This figure represents a gain; Celgene's stock has not declined in any calendar year in the past five years.

Since we looked at Celgene last year, the company has kept its five-point score. Failing to pay dividends is the kiss of death on our scale, but the stock has produced an impressive total return, gaining 50% over the past year.

For Celgene, the big driver for growth lately has been multiple myeloma drug Revlimid. With more than a decade to go before its patent expires, Revlimid's $3.7 billion in sales during 2012 stand only to increase over time. Johnson & Johnson (NYSE: JNJ  ) has a competing drug in the space, Velcade, but even with its fast growth, industry analysts expect Revlimid to maintain its competitive advantage well into the future.

The rest of its drug lineup has been a mixed bag for Celgene. Vidaza is still its No. 2 seller despite having lost patent protection, but that could change at any point if a generic competitor comes into the market, which Celgene expects by the beginning of 2014. Moreover, earlier this month, Celgene's phase 3 trial of psoriasis drug apremilast produced disappointing results, as a lower proportion of patients reached the trial's end goals than in previous phase-2 trials. With efficacy levels more than double what apremilast was able to achieve, AbbVie's (NYSE: ABBV  ) Humira seems poised to retain its blockbuster status, even though apremilast met its primary endpoint and could be part of an application for FDA approval later this year.

But Celgene hasn't been afraid to take risks in order to boost its prospects. The $2.9 billion that Celgene spent to buy Abraxis and its Abraxane treatment for metastatic breast cancer in 2010 represented a big gamble at the time, and so far, sales of the drug haven't climbed very quickly. But with multiple ongoing studies looking to expand the drug's use to treat other diseases, Abraxane has substantial potential, especially in the difficult-to-treat pancreatic cancer area.

For retirees and other conservative investors, Celgene's high valuation and lack of dividend make the stock a departure from the usual fare for a retirement portfolio. Only if you're comfortable with Celgene's future growth prospects would it make sense for you to consider adding the biotech as part of the more speculative side of your investment strategy.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Despite its valuation -- or perhaps because of it -- every in-the-know biotech investor has an eye on Celgene. Shares have skyrocketed this year as the company outlined a plan to almost triple its profits in only a few years. But should you buy the story Celgene is selling? Make sure you understand the key opportunities and risks facing this company by picking up The Motley Fool's brand new premium report on Celgene. To claim your copy today simply click here now.

Add Celgene to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.


Read/Post Comments (1) | Recommend This Article (4)

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  • Report this Comment On March 17, 2013, at 3:25 PM, biotech101invest wrote:

    Good article. Yes its time for a complete revaluation of Celgene based upon operating leverage, FIVE separate billion $ a yr drugs and likelihood of MM-020 being positive, which Citi says could add $3.31-$7.71 related incremental EPS,

    Barclays presentation last wk showed MM-020 a Q2/Q313 milestone. Clearly people are starting to realize that the odds have increased GREATLY that this trial will be successful.The ML change from bearish on MM-020 to bullish earlier this week, the Bernstein positive MM-020 comments last week and increase target to $137 today and Citi who was first and sees incremental $3.31 to $7.71 on positive data (amazing right?) And this might be low. The front line expansion MM will eventually be WORLDWIDE with 96% margin and 16% tax rate. Revlimid will definitely become the biggest selling per yr cancer drug of all time. If you see great success in lymphoma and in Revlimid-Rituxan and other combinations - it could eventually take on Lipitor as the largest selling drug of all time - yes well over $10 billion. But CELG doesn't even need close to that for this stock to be a $300 stock down the road. ITalso will have FOUR other $billion a yr drugs in addition to Revlimid.

    Out yr EPS is significantly significantly understated. Many analysts are STILL missing this – not understanding the HUGE upside of the international expansion into front line and lymphoma. Pipeline is undervalued. The operating leverage of taking a 96% margin drug to $7-8 billion with a 16% tax rate plus adding 4 other $billion dollar a yr drugs is being lost on investors. This stock is VASTLY undervalued and the valuations are based on WAY conservative estimates. CFO can smile because she knows she can beat 2017 ests easily already. People keep waiting for a pullback – this stock is still under a 1.0 PEG with BS conservative numbers. 0.4 PEG on real 2016 numbers. Our BIIB run is starting - just starting - and they did it mostly on the back of 1 drug. CELG now has 5 drugs that will be $1 billion a yr, including 1 that could approach $10 billion a yr with 96% margins and 3 that will likely be $2 billion plus a yr. Remember Genentech became an $80 billion company with less than what CELG has. Its gross margins were in the mid 80%s - Celgene's are in the mid 90%s. Their tax rate was in the 30% area. Celgene's is near 16%. Celgene has a better pipeline - there is NEGATIVE value for this pipeline - Stay tuned with more on that pipeline at May 6 R&D day. This stock is going to $200 then $300 long term - and that imo is only the beginning. A case for $20 EPS before 2020 can be made now - with at least a 35% growth rate. with a standard 1.0 PEG that is $700. even at a 0.7 PEG that would be $490. Lets not get crazy - but suffice it to say this is a stock that is vastly undervalued. No stock in the S&P 500 has the OPERATING LEVERAGE this stock is about to go through. Sales exploding - ONE billion $ a yr drug to FIVE billion $ a yr drugs. 95%+ margins. 16% tax rate. R&D as a percentage of revenue about to drop significantly.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

10/24/2014 3:59 PM
CELG $103.24 Up +2.84 +2.83%
Celgene CAPS Rating: *****
JNJ $103.13 Up +0.50 +0.49%
Johnson & Johnson CAPS Rating: ****

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