This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." In "This Just In," we'll show you whether those analysts actually know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike, to track the long-term performance of Wall Street's best and brightest.

And speaking of the best ...
"AMGN has $6.00 in EPS potential looking out to 2012-2013 and we would attach an 11X multiple to this in order to arrive at our ... $66 target." That's what Standpoint Research said yesterday, initiating coverage of Amgen (Nasdaq: AMGN) with a "buy" rating. It was a bit of a controversial call, since Amgen just finished reporting so-so Q4 2010 earnings. Its sales basically flatlined, and the company guided investors to a fiscal 2011 earnings number with a midpoint below the consensus.

But as Standpoint points out, even if there's reason to be pessimistic about Amgen, a lot of that gloom's already baked into the stock price. Over the past year, shares of the erstwhile biotech superstar have underperformed the S&P 500 by roughly 20 percentage points, lagging 30 points over the past five years. In this case, any "reversion to the mean" at all could work strongly in Amgen's favor. As Standpoint mused, "This may be a situation where we just go in and get out with a 1500 bps gain versus the S&P as opposed to waiting for the stock to hit $66."

Bargain, ho!
If anyone's picks deserve our attention, Standpoint does. It may not be a biotech "specialist," but Standpoint has developed a reputation for getting in and getting out of these types of stocks with strong, low-risk profits. Of its three relatively recent recommendations, the profits from its two winners more than recouped the losses at its sole laggard:

Citing its proprietary value-hunting metrics, Standpoint names Amgen the No. 44 stock out of 200 health-care names it analyst tracks. (Both Gilead and Biogen Idec rank higher.) But why?

 The analyst names several growth catalysts at the company:

• Amgen's recent purchase of an Irish manufacturing facility from Pfizer (NYSE: PFE).
• Its purchase earlier this month of BioVex, which has products in development for the treatment of cancer and certain STDs.
• And multiple other product lines, both in development and already on the market.

Price at a reasonable growth (rate)
Amgen's undeniably pegged for lower revenue growth than any of the stocks named above. Gilead in particular is expected to grow nearly twice as fast as Amgen, at 14.6% per year over the next five years. Still, Standpoint seems to think that 7% growth amply justifies buying Amgen at today's price. After all, even if 7% is all Amgen can manage, that would be greater growth than rivals Johnson & Johnson (NYSE: JNJ), Novartis (NYSE: NVS), or Sanofi-Aventis (NYSE: SNY) are expected to muster. What's more, each of these three contenders currently boasts a P/E ratio higher than Amgen's, despite the latter's slower growth rates.

Foolish takeaway
Standpoint therefore makes a good case for Amgen being a relative bargain when compared to the alternatives. Personally, though, I'm not convinced it's cheap enough to offer Foolish investors an absolute steal of a deal.

At just more than 11 times projected earnings, and just less than 10 times free cash flow, Amgen's starting to look attractive. But to tip the scales in favor of buying the stock, I'd want to see either: (1) a growth rate at least in the low double-digits, (2) more robust cashflow, or (3) a cheaper stock price.

Unfortunately, Amgen has already cut back its capital spending enormously from what it was spending earlier in the decade. There's not much more fat to trim there. In order to justify a buy rating, I really think the company needs to get its cash generation machine back on line. Until it does, I'm going to have to disagree with Standpoint on this one, and reluctantly suggest you wait for better prices before buying in.