Amgen has had an impressive run over the past six months as its shares have beaten the S&P 500 by 5.7%. The stock now trades at $441.95, marking a 16.5% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Following the strength, is AMGN a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Does AMGN Stock Spark Debate?
Founded in 1980 during the early days of the biotechnology revolution, Amgen (NASDAQ: AMGN) is a biotechnology company that discovers, develops, and manufactures innovative medicines to treat serious illnesses like cancer, osteoporosis, and autoimmune diseases.
Two Positive Attributes:
1. Economies of Scale Give It Negotiating Leverage with Suppliers
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With $38.1 billion in revenue over the past 12 months, Amgen sports economies of scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Amgen has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the healthcare sector, averaging 28.2% over the last five years.
One Reason to Be Careful:
New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Amgen’s ROIC has decreased significantly over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.
Final Judgment
Amgen has huge potential even though it has some open questions, and with its shares outperforming the market lately, the stock trades at 18.9× forward P/E (or $441.95 per share). Is now a good time to initiate a position? See for yourself in our in-depth research report, it’s free.
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