by Lawrence Meyers | November 30, 2011 12:31 pm
One of my first purchases in the stock market back in 1995 was Amgen (NASDAQ:AMGN). At the time, it was a world-class biotech company with many years of solid growth behind it — and ahead of it. That was then. Things have changed. Amgen still is a world-class operation, but its growth is anemic (no pun intended) and I just don’t see a compelling reason to buy it.
There are, however, compelling reasons to buy another pharma stock — even to the point of selling Amgen and reallocating those funds to this other choice.
Amgen simply isn’t a growth story anymore, and once the big growth goes away, the only reason to hold a stock is to enjoy modest growth and a solid dividend. Amgen really isn’t producing either. With revenue growth at 3%, net earnings are only going to be up 2% this year and 7% next year, with projected five-year annualized growth at 7.25%. If you put an 8 P/E on 2012 earnings of $5.70, you get $46 per share, which is 20% below today’s stock price. AMGN yields only 2%, so it isn’t throwing its net income back to shareholders, which doesn’t make it a compelling retirement investment, either.
It’s not all bad news. Amgen has almost $4 billion in net cash and regularly produces about $5 billion in annual free cash flow. But the problem with a biotech company is that cash flow needs to go back into R&D and not to dividends for the company to stay competitive. It’s just not a compelling story anymore.
I feel differently about AstraZeneca (NYSE:AZN). Now, you might look at the company’s earnings projections and think I’m crazy. Yes, earnings will be up 8% this year, then go down a full 14% next year, and yes, the dividend was cut from 6% to 4%. But the reason is that AstraZeneca is being proactive in restructuring its business, cutting costs and improving efficiencies company-wide. The goal is optimize the company’s performance as it enjoys its massive revenue streams from drugs like Crestor, Pulmicort and Nexium.
AstraZeneca is taking a big hit to earnings, as mentioned above, by restructuring its R&D division, but expects to wring billions in savings beginning in 2014. Meanwhile, emerging market revenue was up 16%, and the company barely has penetrated China or Latin America. The company is positioning itself for the next era of its history. With more than $10 billion in annual free cash flow, $4 billion in net cash and a strong management team, AstraZeneca is a nice retirement portfolio purchase for its 4% yield, and for long-term investors who can be patient with the company’s next phase of life.
Biotech and pharma can be tough places to invest. You do need to have some expertise. If you are too worried about jumping in or out of particular stocks, but recognize the importance of exposure to the health care sector, consider an ETF like iShares S&P Global Healthcare Sector ETF (NYSE:IXJ).
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned stocks.
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