Analyzing Amgen (AMGN)

The key issue in SSGing Amgen, a prominent biotech company, is estimating what its Hi & Lo PEs are likely to be in the next 5 years. AMGN’s PEs have been trending down for the last 5 years, Hi PEs from 75.9 in 2000 to 28.7 in 2005 and Lo PEs from 47.2 in 2000 to 18.5 Lo in 2005. It is difficult to predict whether these PEs will continue to go down and, if so, to what extent. Yet, the SSG requires that we make a projection.

The SSG’s future valuation along with projected risk and reward are all based on estimating Hi and Lo PEs for the next 5 years. Hi PE is the High Price for the year multiplied by the EPS for the year and the Lo PE is the Low Price for the year times the EPS for the year.

Here are AMGN’s historic PEs for the last 10 years:

……………………Hi PE……Lo PE

1996………………27.5…….26.5
1997………………25.7…….16.6
1998………………33.6…….14.4
1999………………67.1…….25.9
2000………………75.9…….47.2
2001………………63.6…….38.5
2002………………48.0…….23.4
2003………………43.1…….28.6
2004………………30.0…….23.3
2005………………28.7…….18.5

last 5 yr ave……..42.7…….26.5
10 yr ave…………44.3…….25.8
2004-05 ave……..29.4…….20.9
5 highest out…….29.1…….18.8 **
2005………………28.7…….18.7

** This is usually the most conservative option of the SSG software, certainly when PEs are trending up, and it is often called Alt-M after its keyboard command.

Here are three SSGs of AMGN, two I did with different PE assumptions:

…………………………IAS…………Armin-1……Armin-2

Est Sales Growth…….18.00%…….12.50%…..same
Est EPS Growth………20.00%…….11.40%…..same
Est Hi PE………………33.5………..28.7……….25.0
Est Hi Price………$278.40……$156.70…..$136.50
Est Lo PE………………20.0………..18.5……….16.1
Est Lo Price……………$48.10……..$52.00……$51.20
Reward/Risk (U/D)…..11.6…………6.7………..5.0
Total Return (TR)…….33.2%………19.0%……15.8%
Current Price………….$65.45………$65.53…..same
SSG Date………………7-21-06…….7-5-06……same

The NAIC criteria to buy any growth stock is a minimum Upside/Downside (U/D) of 3.0 AND a mimimum Total Return (TR) of 15% compound annually (including dividends) per year for the next 5 years.

IAS is the Investor Advisor Service, a pay service by professional brokers-analysts published by IClubCentral (www.iclub.com/IAS) which offered a free three month trial for June, July and August 2006.

ANALYSIS:

- Value Line estimated a future High Price in the next 3 to 5 years for AMGN of $85-130 on 6-23-06 when its recent price was $67.35. The IAS estimated High Price of $278.40 is 114% or $148.40 per share greater than VL’s estimate. WOW!! One of my few rules of thumb is never to substantially exceed VL’s estimate without a good reason. IAS provided no reason at all and may not have checked VL;

- IAS used 33.5 as its estimated Hi PE which it says was AMGN’s historic average for 2003-2005 after outliers were eliminated (2001 Hi and Lo PEs, and 2002’s Hi PE were deemed atypical….or outliers in SSG-speak…and eliminated from consideration). IAS’s 33.5 estimated Hi PE led directly to its super-high estimated High Price of $278.40 and whopping 33.2% TR;

- IAS’s 33.5 is higher than the last three Hi PE options listed above: 29.4 that results from 3 outliers, 29.1 from Alt-M, and 28.7 from 2005. IAS’s narrative does not mention the trend of declining PEs and only says that it used AMGN’s historic Hi PE and that it arbitrarily reduced the expected Lo PE to 20. No reasons or explanations were set forth;

- I used a Hi PE of 28.7 (from 2005, the lowest of all the choices listed above) in my first SSG scenario. I got an estimated High Price of $156.70 which was 21% or $26.70 per share greater than Value Line’s estimate. I don’t have a good reason to exceed VL by that much as I have not read the company’s annual report(s) nor done any digging into what’s going on with its declining PEs;

- I used a Hi PE of 25 in second SSG scenario and got an estimated High Price of $136.50 which is only $6.50 or 5.0% greater than VL’s estimate. It’s noteworthy that this analysis still satisfies the SSG Buy criteria with a 5.0 UD and 15.8% TR.

- Value Line’s 6-23-06 report for AMGN shows a 23.7 PE in 2005 declining to an estimated 18.0 in the next 3-5 years. VL only reports an overall figure, not Hi and Lo PEs. My second scenario equates to an overall estimated PE of 20.60 (25.0 + 16.1 / 2) which is close enough for me as this is my analysis, not a copy of VL’s. IAS’s overall estimated PE is 26.75 (33.5 + 20.0 / 2).

QUESTIONS:

- What do you think….which analysis do you most agree with?

- Would you use another value for your Hi PE, one that’s higher or lower than my 25.0, and do you have any reason(s) that support your number ?

- Is there any other part of these SSGs that you would do differently or that you have questions about?

armin