When trying to invest in the current environment – a market on the verge of a recession – it is highly vital to identify recession-proof firms and stocks to invest in. When looking at Amgen Inc. (NASDAQ:AMGN) over the last year, the store grew 0.95 percent, outperforming the US stock market.
In the coming quarters, it is more crucial to choose stocks that can help us secure our investment rather than companies that can generate substantial growth in the short term. Having a stable portfolio is an excellent accomplishment during a bear season. And Amgen (NASDAQ:AMGN) is undoubtedly a possibility because we can anticipate the business to perform consistently in the event of a recession, and the stock is also trading at appropriate valuation multiples, limiting the downside risk.
Quarterly Results
Looking at Amgen’s (NASDAQ:AMGN) quarterly results for the first quarter of fiscal 2022, we observe a strong performance. Total sales climbed by 5.7 percent yearly, rising from $5,901 million in Q1/21 to $6,238 million in Q1/22. Operating income might increase 17.4% yearly, from $2,129 million in the same quarter last year to $2,500 million this quarter. While operating income increased, diluted earnings per share fell from $2.83 to $2.68, a 5.3 percent year-over-year drop. Finally, free cash flow increased modestly year over year, rising from $1,938 million in Q1/21 to $1,974 million in Q1/22.
Amgen’s Growth
Looking ahead to fiscal 2022, management anticipates sales to remain more or less consistent, with revenue ranging between $25.4 billion and $26.5 billion. GAAP earnings per share, on the other hand, are predicted to rise between 20% and 30% year on year, to a range of $12.53 to $13.58. Non-GAAP profits per share are estimated to be in the $17.00 to $18.00 range, up from $17.10 in fiscal 2021, resulting in low single-digit growth rates.
However, as long-term investors, we are more concerned with the next few years’ performances than the next few quarters. Amgen (NASDAQ:AMGN) can expand through revenue growth, share buybacks, and margin improvement in the following years.
Recession
As I previously stated, Amgen (NASDAQ:AMGN) is a strong selection for a prospective recession because healthcare companies are often reasonably consistent performers in the event of a recession. This is not surprising given that individuals become ill during economic downturns – and given the mental stress associated with job loss, asset depreciation, or probable house losses, people may become much sicker. Looking at data since the 1980s, we can see that revenue has practically never decreased – not even during a recession. And while we can’t say the same for earnings per share or free cash flow, it’s clear that Amgen does well during recessions. Small swings in free cash flow happened regularly, not only during recessions. While we cannot promise that Amgen can improve revenue, EPS, and FCF every year, we should also not expect the next downturn to significantly negatively impact Amgen.
Intrinsic Value Calculation
When establishing an intrinsic value for Amgen, we can use a discount cash flow calculation with the free cash flow of fiscal 2021 as the base, which was $8.4 billion. The second stage is normally to identify realistic growth rates for the coming years, and to be honest, I would not compute Amgen with a growth rate lower than 3%, which the firm can achieve exclusively through share buybacks.
Of course, Amgen requires comparable levels of free cash flow to continue buying back stock. And free cash flow can only be generated if Amgen (NASDAQ:AMGN) continues introducing new and successful medicines to the market. According to analyst projections, the economy will grow at a 2.7 percent annual rate through fiscal 2031. And while I believe that the growth rate is incredibly low (particularly when compared to prior growth rates), it would result in an intrinsic value of $217.79 for Amgen, making the stock practically fairly valued (assuming a 10 percent discount rate).
While this is our worst-case scenario, we can be a little more optimistic (perhaps also realistic) and anticipate annual growth of roughly 5%. (stemming from revenue growth and share buybacks). When we use 5% yearly growth instead, we get an intrinsic value of $304.90. Therefore Amgen appears to be undervalued right now.
In addition to this base case scenario, we might be more optimistic and construct a bull case scenario. During its most recent “Business Review Meeting,” the organization gave long-term guidance, and management expects sales to rise in the mid-single digits through 2030 and non-GAAP profits per share to expand in the high-single to low-double digits.
With these assumptions (let’s be careful and calculate just with high single-digit growth rates of 9 percent until 2030, followed by 6 percent growth till perpetuity), we get an intrinsic value of $461.68. At this moment, Amgen would be a steal.
Conclusion
Even after accounting for the challenges in estimating revenues for pharmaceutical businesses in the following years, and despite not sharing Amgen’s management’s confidence about double-digit EPS growth in the coming years, Amgen appears to be undervalued.
And, given that Amgen is very recession-proof, it could be one of the better selections for the next several years. It will not be about spectacular growth but rather conserving capital and avoiding being wiped out by a devastating bear market. However, we should still be prepared to lose 40% to 50% during a bad market, as has happened in the past. Amgen appears cheap at the moment, but significant drawdowns during down markets are always possible.
Featured Image: DepositPhotos © alpha-spirit
