Amgen Sell Call Makes Sense

Amgen(AMGN Quote) put up 4% earnings growth on flat revenue. They did it with fewer shares and tight expenses. Epogen and Aranesp revenue is declining, with the full impact of new restrictions on the anemia drugs not yet being felt.

Tell me again why there is reason to be bullish on Amgen?

I posted this question last night in RealMoney's Columnist Conversation after Amgen reported third quarter earnings. Reader Steve R. responded:

"Perhaps because the market has whacked the stock, the valuation is dirt cheap and perhaps they will have a few good drugs in the future! If [Amgen] was trading at 20-30 times earnings, sure, but I believe it is [trading] at 14 times earnings. Would you rather buy at 90 when expectations are high or 55 when there are very low expectations?"

Steve's right. The stock has been whacked, down 23% from its recent high in January. At Wednesday's closing price of $58.13, the stock is trading at 13 times estimated 2008 earnings per share of $4.36, and expectations are low.

But where Steve sees value, I see a value trap. If we assume the Street's crystal ball for Amgen's future earnings is accurate (and I think that's a very risky assumption,) the company will post earnings growth of 8% this year, 4% next year and 10% in 2009.

I'm sorry, but that's weak growth for a company that clings to the notion that it's still a member in good standing of the biotech club. I don't see why a 13-14 multiple is justified for a company with single-digit earnings growth, especially one that will get there mainly by cutting costs and buying back shares.