Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Amgen (AMGN) fares in the ModernGraham valuation model.
Company 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 Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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 = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$92.74|
|Value Based on 0% Growth||$54.37|
|Market Implied Growth Rate||4.82%|
|Net Current Asset Value (NCAV)||-$21.09|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Amgen Inc. is suitable for Enterprising Investors but not for Defensive Investors. The Defensive Investor has concerns with the lack of a long enough dividend record and the high PB ratio. The Enterprising Investor’s only concern is with the high level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Johnson & Johnson (JNJ) and ModernGraham’s valuation of Pfizer Inc. (PFE). As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.12 in 2010 to an estimated $6.40 for 2014. This level of demonstrated growth more than supports the market’s implied estimate of 4.82% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s value investing formula, to return an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Amgen Inc. (AMGN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Amgen Inc. (AMGN) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from wikipedia; this article is not affiliated with the company in any manner.