Amgen Stock Rare Winner on Red Day

One of the few winners from yesterday's brutal trading session was Amgen, a drug manufacturing company whose shares have climbed 5.7% to a price of $245.44, which is near its average analyst target price of $254.07. The average analyst rating for the stock is hold. AMGN outperformed the S&P 500 index by 6.4% during today's premarket session, and by 38.3% over the last year with a return of 20.5%.

Amgen Inc. discovers, develops, manufactures, and delivers human therapeutics worldwide. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.

Amgen's trailing 12 month P/E ratio is 20.9, based on its trailing Eps of $11.76. The company has a forward P/E ratio of 13.1 according to its forward Eps of $18.68 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The problem with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Amgen's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 1.76. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that AMGN is actually fairly valued compared to its projected earnings growth.

To better understand the strength of Amgen's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

AMGN's average gross profit margins over the last four years are 78.8%, which indicate that it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -3.1%.

Amgen's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

  • 2021 free cash flow: $8,381,000,000.00
  • 2020 free cash flow: $9,889,000,000.00
  • 2019 free cash flow: $8,532,000,000.00
  • 2018 free cash flow: $10,558,000,000.00
  • Average free cash flow: $9,340,000,000.00
  • Average free cash flown growth rate: -6.2 %
  • Coefficient of variability (lower numbers indicating more stability): 11.3 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in AMGN have received an annualized dividend yield of 3.2% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Amgen's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 54, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.07 as of the third quarter of 2022.

With an inflated P/E ratio, an elevated P/B ratio, and a steady stream of strong cash flows with a downwards trend, we can conclude that Amgen is probably overvalued at current prices. The stock presents mixed growth indicators because of its consistently strong gross margins that are shrinking, and an average PEG ratio. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.