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Amgen's Shares Slip on Soft Guidance. Time to Buy?

By George Budwell - Jan 31, 2020 at 10:46AM

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Amgen's fourth-quarter earnings contained mostly good news, but shareholders clearly wanted more out of the blue-chip drugmaker.

Yesterday, Amgen (AMGN 0.48%), a blue-chip biotech, reported fourth-quarter earnings. Although the biotech heavyweight topped Wall Street's consensus estimates for its bottom and top lines during the three-month period, investors apparently weren't impressed. Amgen's shares immediately dropped by 3.16% in after-hours trading on the heels of this overall positive earnings report.

What's the deal? The sore spot seems to be Amgen's "soft" revenue guidance for 2020. Specifically, the company said it expects 2020 revenue to come in between $25.0 billion to $25.6 billion, implying year-over-year top-line growth of 9.4% on the high end of the range. Wall Street's prior forecast pegged the biotech's 2020 revenue at approximately $25.5 billion. So, it's not as though Amgen is calling for 2020 to be a complete disaster.

Someone with gloved hands operates a microscope.

Image source: Getty Images.

Should bargain-hunters take advantage of this rather questionable sell-off? Let's consider Amgen's strengths and weaknesses to find out.

Amgen: The bull and bear case

What's the biggest knock against Amgen's bull case? The most pressing concern among investors seems to be the biotech's ongoing battle against generic and biosimilar competition. Amgen has continually had to drop the net selling price for several key legacy products due to this issue. In fact, the biotech warned investors during this latest earnings call that further price erosion is likely to occur again this year.

To offset this pricing headwind, Amgen is banking on a healthy rise in sales volume across its growth portfolio in 2020. Fortunately, this stated goal does seem feasible thanks to the $13.4 billion acquisition of psoriasis medication Otezla last year, along with the strong commercial performance of multiple growth-oriented brands such as osteoporosis treatment Prolia and migraine drug Aimovig, among others. 

There are two inter-related issues that should concern shareholders, though. First of all, the biotech's cash position dropped from $29.3 billion to $8.9 billion year over year, mainly due to the costly Otezla transaction in 2019. Secondly, Amgen decided to plow $7.6 billion into share repurchases last year. It also has a whopping $6.5 billion remaining in authorized buybacks under the current plan. Amgen's aggressive capital allocation strategy is a tad concerning in light of the biotech's enormous debt load of almost $30 billion.

Amgen should have ample free cash flow to service this debt without issue in 2020. However, a global economic downturn -- perhaps one triggered by a pandemic -- could put the biotech in a bind at some point. Put bluntly, Amgen might want to rethink its capital allocation strategy given the potentially severe economic ramifications of the deadly coronavirus currently ravaging important emerging markets such as China.   

Amgen's bull case, though, is arguably far more compelling than the bear thesis right now. Apart from its healthy top-line growth prospects in 2020 and beyond, Amgen's stock is presently trading at a mere 12.98 times next year's projected earnings. That's not exactly bargain territory for a large-cap biotech stock, but it's also a far cry from where other biopharmas, such as AstraZeneca and Eli Lilly, are trading at right now. Moreover, Amgen recently boosted its dividend by a noteworthy 10%, bringing its forward-looking annualized yield to a respectable 2.82%. That's slightly above average for its immediate peer group. 

Time to buy?

It's hard to go wrong owning Amgen's stock for the long haul. This large-cap biotech stock has been one of the absolute best investing vehicles over the past 10 years. There's also no overarching reason to believe this trend won't continue for the next 10 years. Bargain hunters may indeed want to capitalize on the market's puzzling reaction to Amgen's fourth-quarter results.  

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Stocks Mentioned

Amgen Inc. Stock Quote
Amgen Inc.
$246.73 (0.48%) $1.18
Eli Lilly and Company Stock Quote
Eli Lilly and Company
$327.18 (0.76%) $2.47
AstraZeneca PLC Stock Quote
AstraZeneca PLC
$65.51 (-0.67%) $0.44

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