Standing out among the Street's worst performers today is Amgen, a biotechnology company whose shares slumped -8.4% to a price of $294.91, 11.99% below its average analyst target price of $335.1.
The average analyst rating for the stock is buy. AMGN lagged the S&P 500 index by -8.0% so far today and by -14.3% over the last year, returning 19.2%.
Amgen Inc. discovers, develops, manufactures, and delivers human therapeutics worldwide. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Amgen's trailing 12 month P/E ratio is 37.7, based on its trailing EPS of $7.82. The company has a forward P/E ratio of 14.3 according to its forward EPS of $20.67 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the health care sector has an average P/E ratio of 26.07, and the average for the S&P 500 is 29.3.
To better understand AMGN’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Amgen’s PEG is 2.95, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Amgen was $7.36 Billion as of its last annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $8.92 Billion and they've been growing at an average rate of -5.1%. AMGN's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.8% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Amgen's P/B ratio is 21.06 -- in other words, the market value of the company exceeds its book value by a factor of more than 21, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 3.53 as of the third quarter of 2024.
Amgen is likely overvalued at today's prices because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and positive cash flows with a downwards trend. The stock has poor growth indicators because of its decent operating margins with a negative growth trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into AMGN's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
