Amgen Shares Have the Right Prescription for Long-Term Growth

NEW YORK (TheStreet) -- You will be hard-pressed to find a stronger name than Amgen (AMGN) in the biotech/pharma space.

The stock closed Friday at $122.84, up 0.47%; by noon on Monday they were down another 0.7% to $121.99. Shares are up just shy of 7% on the year to date, trailing the health care sector's 13% gain. The company reports second-quarter earnings on Tuesday.

Investors are unsure of what to make of the stock, which doesn't appear to present any long-term value. To those skeptics, I say, let's widen the scope.

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With a price-to-earnings ratio of close to 20, Amgen doesn't cheap to some. But in the near-term, Amgen should continue to benefit from efficient cost controls and stable market share gains. The company's management has done and will continue to do exactly what they were told they couldn’t -- manage growth and profits. This has become the perfect formula for a higher stock price.

This means that around $122 per share, Amgen stock can still do well for investors looking for exposure in the biotech space. On the basis of improving cash flow and positive clinical trial data, these shares should reach $130 by the end of the year and $135 in the next six to 12 months.

The trailing P/E of 20 may not present an obvious value, but on a forward-looking basis, that P/E drops to 14. So I wouldn't consider the stock expensive until it reaches at least $130, which is still 6% above current value.

And even assuming Amgen does report a strong quarter on Tuesday, investors still may not realize the company's true value until one to two years down the line. This is because Amgen recently disclosed successful results for its phase-3 thyroid drug product AMG 416. It was discovered that the drug met both primary and secondary endpoints for hyperparathyroidism.

With close to 13 million people being affected by hyperparathyroidism (kidney failure), AMG 416 can become a lucrative drug for Amgen in the coming years.

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What's more, due to expanding margins, the company is consistently growing its operating income. Analysts underestimated the extent to which management would reconcile prior concerns about Amgen's competitive position -- particularly in terms of its pipeline. That, plus stronger capital expense controls for three consecutive quarters, places Amgen in the top tier of profit generators within the sector.

Regarding the pipeline, there is still the threat from the likes of Teva Pharmaceuticals (TEVA), which is working on a rival product to Amgen's cancer drug Neulasta. For that matter, advances made from companies like Gilead (GILD) and Celgene (CELG) are keeping Amgen investors awake at night.

Given that Neulasta accounts for 25% of Amgen's revenue, these are valid concerns. But it also assumes that Amgen management would just allow their market to be taken away.

Teva and other rivals would need a much bigger marketing and distribution infrastructure before Amgen, an established market leader, could be dethroned.

Despite the naysayers, Amgen continues to invest in strong growth areas like oncology. The company's $10 billion deal for Onyx Pharmaceuticals demonstrates how committed management is towards preserving Amgen's market position.

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The way I see it, it's only a matter of time before the Onyx buy begins to pay off. And that's not going to happen in just one quarter or two. Making a play here on Amgen is about the future. That's where a focus on the fundamentals become important.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates AMGEN INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMGEN INC (AMGN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, good cash flow from operations, increase in stock price during the past year and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AMGN's revenue growth trails the industry average of 36.6%. Since the same quarter one year prior, revenues slightly increased by 6.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has slightly increased to $1,142.00 million or 8.86% when compared to the same quarter last year. In addition, AMGEN INC has also vastly surpassed the industry average cash flow growth rate of -71.74%.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • AMGEN INC's earnings per share declined by 25.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, AMGEN INC increased its bottom line by earning $6.65 versus $5.51 in the prior year. This year, the market expects an improvement in earnings ($8.10 versus $6.65).

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