Pipeline at Amgen Undervalued
Amgen, Inc. (AMGN), a global biotechnology company, is focused on the development and commercialization of human therapeutics. The company's key products are Epogen/Aranesp (anemia), Neupogen/Neulasta (neutropenia) and Enbrel (inflammatory disease). Recent negative events surrounding lead product Aranesp have punished the shares greatly.
Results in the fourth quarter demonstrate the challenging ESA market. Nevertheless, we still feel as though the pipeline is significantly undervalued, and we continue to recommend the name as a long-term hold within the biotechnology sector.
Investors have struggled to value Amgen of the past few years. Is it biotech or is it pharma? Now, with the stock trading at $40 per share, back where it was in 1999, we think a better question to ask is: Is Amgen a great value, or a great value-trap?
Based on our 2008 through 2012 model, the 5-year earnings CAGR of 6% is generally in-line with that of most large-cap pharmaceutical companies. Yet it is well below some of the larger biotechnology peers, which should deliver 12-15% growth over the same time period. That should help investors value the stock on a multiple basis. The biotech group currently trades at around a 1.7x PEG. Applying this valuation metric to Amgen, we arrive at a P/E of 10x. That is not coincidently exactly where the stock is trading right now.
Therefore, investment in Amgen should be based on perceptions of that 6% 5-year CAGR. Is it understated due to recent ESA concerns? Are investors ignoring the pipeline? Or, is it overstated because the ESA franchise will continue to decline for the foreseeable future and the pipeline lacks the power to replace the lost sales.
In our view, investors have over-reacted to the Aranesp news. Amgen is still an enormously profitable company generating significant cash flow over $2 billion in 2007. Our DCF analysis shows fair value in the $60s. However, noting that perception takes precedence over reality, the stock will probably not achieve full DCF value until after the ODAC meeting in March, and after we get another one or two quarters of ESA stabilization.
Finally, as pipeline product -- specifically Denosumab -- offer data, the market should begin to assign more value to the future. We see fair value at $48 or 11.5x our 2008 EPS of $4.22. We encourage long-term investors to purchase the shares at today's price. We view Amgen as a core holding within the sector.
Jones Lang LaSalle Best in Class
Jones Lang LaSalle, Inc. (JLL) reported record 4Q07 and full-year 2007 results with net income of $105 million ($3.16 per share) in the 4th quarter and $256 million ($7.64 per share) in 2007. Fourth quarter and full-year results were significantly higher than the previous year periods. Favorable market conditions and positive returns from the company's earlier investments continue to drive results.
While transactional income should slow in the US in 2008, JLL is well diversified internationally, and will be able to weather the current downturn in US real estate. Despite a recent share sell-off, we maintain our Buy rating.
JLL is one of the best real estate service firms and at the current valuation the company appears cheap relative to long-term growth prospects. While we expect a slowdown in transactional income in 2008 due to a slowdown in global real estate, we expect the company to outperform its peer group.
We think JLL is the best positioned real estate services company. Based on 2008 estimates, the company is now trading at 7.8x our estimates and 11.3x our 2008 EBITDA projections. Based on EPS and EBITDA/share projections, the company is trading at a discount to its peers.
The stock has dropped substantially over the past six months, about 26%, as investors are worried about the health of commercial real estate markets. We are still bullish on JLL; the company has low debt, produces plenty of cash and can usually dominate local markets. JLL also has a worldwide footprint unrivaled by most competitors. Recent new hires will negatively affect near-term earnings, although the company is setting itself up for future growth. We are setting our price target at $85 per share or 11.5x 2008 EPS estimates.
Consider China Life Undervalued
China Life Insurance Company, Ltd. (LFC) announced strong financial results for 2007, due to robust growth in premiums and investments.
