The Case For Amgen

I have received a lot of questions in the past week regarding Amgen and am going to present the bull case on the stock. In order to present the bull case I want to first present the bear case. The Goldman Sachs analyst is the most bearish analyst of the major brokerage firms on Amgen with a sell rating and a $50 price target. These are the assumptions the Goldman analyst makes in arriving at his $50 price target:
  • The analyst uses a discounted cash flow model with a 10% weighted average cost of capital in order to come to his $50 price target. This means that the analyst assumes that an investor in Amgen requires a 10% a year return in order to invest in Amgen. In order to receive a 10% a year return the stock would need to be $50.
  • The analyst assumes that the $3 billion a year that Amgen spends on research and development yields nothing.
  • The analyst assumes that all of Amgen's drugs will have disappointing sales relative to expectations.
  • The analyst assumes that biosimilars will have a larger than expected effect on sales of Amgen's drugs.
This bearish analysis is exactly what makes me bullish on the stock. According to the biggest bear on the stock even if everything goes wrong, at $50 Amgen is priced to return 10% a year. If by some chance sales are not as bad as this analyst believes or the $3 billion a year in R&D yields something the return will be even greater. Making 10% a year is a worst case scenario that I can live with.

Whenever I see a stock that looks attractive I always ask what's the catch. I seek out the bear case because in many cases when a stock looks cheap there is a good reason. In the case of Amgen I believe the company has challenges but that the stock price more than reflects these challenges.

6 comments:

Anonymous said...

OK, but doesn't the HUGE selloff at yesterday's close look bad ?

Tsachy Mishal said...

Bad in what sense? Bad for the stock or monkey business?

Anonymous said...

Bad for the stock, of course.
As you know, the stock market does not always reflect what's going on in the real world.
Yesterday's close showed some big player getting rid of a lot of stocks.
I don't know what it means for the future, but it sure is scary.

Tsachy Mishal said...

On Friday it looked great. Yesterday it looked terrible Buy high, sell low? I dont trade based on a bad close.

Anonymous said...

What is going to turn this stock around? Although they have an aging portfolio they do have cash and a new drug.

Given that I own this close to the all time highs I feel like this one stock is going to given to kids.

I have watched this company being steered slowly downward for almost 5 years and nothing to show for it.

Tsachy Mishal said...

I think Amgen can trade in the high 50's-low 60's without much of a catalyst, although I believe the closing of the Genzyme deal will be a catalyst for the entire biotech sector. To trade higher than that I think sales have to surprise to the upside or they have to make progress on their pipeline.