Sometimes a company can have a lot going for it but its stock simply does not respond. That’s been the case for Amgen (NASDAQ:AMGN). I was an investor in the stock’s best days of the late 1990s, when it ran from $16 to over $60. I check in every now and then to see what’s happening with the company and the stock, but ever since it hit its peak in 2005, the stock never saw those highs again and has struggled ever since.
Amgen is a biotech company and always has something in development. Its latest drug is Xgeva — used to prevent bone fractures in cancer patients — on track for annual sales of about $300 million. Yet despite this drug, as well as the others Amgen is developing, the market isn’t loving the stock. Maybe that’s because revenues and earnings have stagnated. Analysts project revenue growth of only 2.3% this year and 3.7% next year. Earnings are expected to be flat this year and grow about 8% next year, with five-year annualized projected growth of 7.35%.
This is really on the low end of what I like to see in what Peter Lynch called a “stalwart.” It also is lower than I like to see in a biotech company. But are other metrics strong enough to convince this investor to buy?
There are lots of compelling numbers for Amgen. It’s trailing 12-month net profit margin is an amazing 29.72%. Its return on equity is 18.67%. That says Amgen’s products are extraordinarily profitable, and its efficiency in generating those profits is very high. The company sits on $17.4 billion in cash, offset by $10.9 billion in debt, so the balance sheet is fabulous. Even better, that debt is only being carried at about a 5% interest rate. Finally, the company routinely throws off free cash flow of between $5 billion and $6 billion annually.
In other words, Amgen is a cash cow, but it isn’t growing. If this were any other type of company, I’d tell management to start paying out all that excess cash as a dividend. Right now, Amgen does indeed pay a 2.1% dividend. However, the Faustian bargain of biotech is that these companies must constantly reinvest cash into R&D to keep finding those new discoveries to generate more cash, rather than pay it to shareholders. So Amgen ends up with a dividend that is not enticing enough for retirees, and it is so mature that it isn’t growing.
When you look at all this information — and see that Amgen stock hasn’t gone anywhere in the past decade — I say it’s either a sell or a suggestion to not bother buying.
Disclosure: Lawrence Meyers does not own shares of Amgen.
