ModernGraham Valuation: Amgen, Inc. (AMGN)

moneyCompany Profile (obtained from Google Finance): Amgen Inc. is a global biotechnology pioneer that discovers, develops, manufactures and delivers human therapeutics. Its medicines help millions of patients in the fight against cancer, kidney disease, rheumatoid arthritis (RA), bone disease, and other serious illnesses. On December 10, 2012, the Company acquired all of the outstanding stock of deCODE Genetics (deCODE). In July 5, 2012, the Company acquired KAI Pharmaceuticals, a privately held company based in South San Francisco. In September 2013, Swedish Orphan Biovitrum AB (publ) (Sobi) announced that they have acquired the full rights to develop and commercialize Kineret (anakinra) from Amgen Inc for all therapeutic indications.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $134.31
MG Opinion Fairly Valued
Value Based on 3% Growth $80.32
Value Based on 0% Growth $47.08
Market Implied Growth Rate 5.91%
Net Current Asset Value (NCAV) -$6.19
PEmg 20.32
Current Ratio 6.33
PB Ratio 3.91

Balance Sheet – 9/30/2013 

Current Assets $30,675,000,000
Current Liabilities $4,843,000,000
Total Debt $27,178,000,000
Total Assets $57,073,000,000
Intangible Assets $16,254,000,000
Total Liabilities $35,345,000,000
Outstanding Shares 754,100,000

Earnings Per Share

2013 (estimate) $6.96
2012 $5.52
2011 $4.04
2010 $4.79
2009 $4.51
2008 $3.90
2007 $2.82
2006 $2.48
2005 $2.92
2004 $1.79
2003 $1.68
2002 -$1.21

Earnings Per Share – Modern Graham 

2013 (estimate) $5.54
2012 $4.74
2011 $4.23
2010 $4.12
2009 $3.63
2008 $3.06

Conclusion:

Amgen Inc. is a solid company for the Enterprising Investor after passing all five of the requirements for the investor type.  The company fails to qualify for the Defensive Investor because of its lack of a dividend history, and because it currently is trading at high PEmg and PB ratios.  From a valuation perspective, the company has achieved strong and consistent growth, having taken EPSmg (normalized earnings) from $3.06 in 2008 to an estimated $5.54 for 2013.  This level of earnings growth supports the market’s implied estimate of 5.91%, and as a result the company would appear to be fairly valued.  Enterprising Investors should feel comfortable proceeding with further research into whether Amgen Inc. would be suitable for their individual portfolios, while Defensive Investors should keep the company on a watch list.

What do you think?  Do you agree that Amgen, Inc. is fairly valued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Amgen, Inc. (AMGN) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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