AMGN Stock Study (6-1-23)

Posted by Mark on July 11, 2023 at 06:58 | Last modified: June 1, 2023 11:05

I recently did a stock study on Amgen Inc. (AMGN) with a closing price of $220.65.

M* writes:

     > Amgen is a leader in biotechnology-based human therapeutics, with
     > historical expertise in renal disease and cancer supportive-care
     > products. Flagship drugs include red blood cell boosters Epogen
     > and Aranesp, immune system boosters Neupogen and Neulasta, and
     > Enbrel and Otezla for inflammatory diseases. Amgen introduced its
     > first cancer therapeutic, Vectibix, in 2006 and markets bone-
     > strengthening drug Prolia/Xgeva (approved 2010) and Evenity
     > (2019). The acquisition of Onyx bolstered the firm’s therapeutic
     > oncology portfolio with Kyprolis. Recent launches include Repatha
     > (cholesterol-lowering), Aimovig (migraine), Lumakras (lung
     > cancer), and Tezspire (asthma). Amgen’s biosimilar portfolio
     > includes Mvasi (biosimilar Avastin), Kanjinti (biosimilar
     > Herceptin), and Amjevita (biosimilar Humira).

This large-size company has grown sales and earnings at annualized rates of 3.6% and 6.8% (’17 EPS excluded), respectively, over the past decade. Lines are mostly up and parallel except for sales dips in ’17 and ’19, EPS crash in ’17 (fits the TCJA profile), and EPS dips in ’20 and ’21. PTPM has led peer and industry averages despite tracing an “inverse-U” pattern while going from 28.2% in ’13 to 27.9% in ’22 with a last-5-year mean of 33.0%.

ROE has led peer and industry averages since ’18 when it spiked from 6.0% to 55.4% and hasn’t looked back since. The last-5-year mean is 87.4%, which includes 177% in ’22. Value Line calls this NMF.

Debt-to-Capital explains both the high ROE and Value Line’s NMF description with a last-5-year mean of 80.2%. This has been significantly greater than peer and industry averages and will probably be a deal breaker for some.

Other financial metrics look more encouraging. Quick Ratio is 2.6 and Interest Coverage is 6.2. Value Line rates the company A++ for Financial Strength. M* rates the company Exemplary for Capital Allocation and writes:

     > Amgen possesses a sound balance sheet… $30 billion in net debt (as
     > of the end of 2022) [represents] a net debt/EBITDA ratio around 2,
     > which we think is manageable as we model steady cash flows over the
     > next several years. If the Horizon deal closes later this year, net
     > debt/EBITDA could rise to around 3, but we still view this as very
     > manageable given annual expected free cash flows above $10 billion.

M* also awards the company a Wide Economic Moat.

With regard to sales growth:

• CNN Business projects 4.6% YOY and 7.2% per year for ’23 and ’22-’24, respectively (based on 18 analysts).
• YF projects YOY 0.8% and 6.8% for ’23 and ’24, respectively (11 analysts).
• Zacks projects YOY 5.6% and 10.8% for ’23 and ’24, respectively (8).
• Value Line projects 5.7% annualized growth from ’22-’27.
• CFRA projects 8.0% YOY and 9.4% per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year ACE of 6.4% per year.

I forecast long-term sales growth below the range at 4.0%.

With regard to EPS growth:

• CNN Business reports ACE of 1.9% YOY and 4.5% per year for ’23 and ’22-’24, respectively (based on 18 analysts), along with 5-year annualized growth of 5.0%.
• MarketWatch projects 4.5% and 5.2% per year for ’22-’24 and ’22-’25, respectively (26 analysts).
• Nasdaq.com projects 7.4% YOY and 5.6% per year for ’23-’25 and ’23-’26 (10, 8, and 6 analysts for ’23, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 4.3%.
• YF projects YOY 0.7% and 5.7% for ’23 and ’24, respectively (11), along with 5-year annualized growth of 1.7%.
• Zacks projects YOY 2.4% and 6.3% for ’23 and ’24, respectively (9), along with 5-year annualized growth of 7.0%.
• Value Line projects 6.3% annualized growth from ’22-’27.
• CFRA projects 1.6% YOY and 4.6% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 5.0%.
• M* projects long-term annualized growth of 10.4%.

I am forecasting below the long-term-estimate range (mean of six: 5.8%) at 4.0% (YF’s 1.7% is curious and not a typo). My initial value will be ’22 EPS of $12.11/share rather than Q1 ’23 $14.71/share (annualized).

My Forecast High P/E is 18. Over the last decade, high P/E has ranged from 16.7 in ’18 to 26.9 in ’21 (71.0 in ’17 excluded) with a last-5-year mean of 21.7. I am forecasting just below the last-5-year-mean average P/E of 18.6.

My Forecast Low P/E is 14. Over the last decade, low P/E has ranged from 12.3 in ’13 to 19.3 in ’21 (54.4 in ’17 excluded) with a last-5-year mean of 15.5. I am forecasting just below the last-10-year median P/E of 14.4.

My Low Stock Price Forecast (LSPF) is the default value of $169.50 (based on initial EPS of $12.11/share). This is 23.2% less than the previous closing price and 20.9% less than the 2022 low.

Over the past decade, Payout Ratio has steadily increased from 28.3% in ’13 to 64.1% in ’22 (171% in ’17 excluded) with a last-5-year mean of 54.3%. I am forecasting conservatively below the range at 28.0%.

These inputs land AMGN in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 5.3%.

PAR (using Forecast Average—not High—P/E) is 3.1%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 140 studies over the past 90 days (my study and 42 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.0%, 7.9%, 19.4, 14.4, and 52.4%, respectively. I am equal on sales growth and lower on the rest. Value Line projects an average annual P/E of 16.0, which is lower than MS (16.9) and equal to mine.

MS high and low EPS are $19.41/share and $12.11/share where I have $14.73 and $12.11. My high EPS is lower due to a growth rate that significantly lowers the upper end of the forecast stock price range. Q1 ’23 EPS is almost to my high EPS at the beginning of the 5-year period so this will need adjustment if the company stays on its growth trajectory.

MS LSPF of $185.20 is 9.3% greater than mine, implies a low P/E of 15.3 (versus the above-stated 14.4) and is 6.2% greater than the MS default of $12.11 * 14.4 = $174.38. The latter results in more aggressive zoning.

PEG ratio is another value check that I have recently begun to monitor. My forward PEG is 16.0 / 4 = 4.0. A generally accepted upper limit is 1.0 – 1.5, but it’s also good to compare against the industry average [for which I don’t have a number]. Zacks has a forward PEG of 1.74 based on the current P/E and future growth projection. For an apples-to-apples comparison, perhaps the 16.0 [future forecast] is wrong to use. Zacks has P/E listed as 12.2 whereas M* has current P/E listed as 15.0. In this instance, though, my low EPS growth forecast is responsible for the high PEG more than anything else.

MOS seems decent in this study, but the stock is currently too expensive. I would look to re-evaluate under $190/share.