Despite trading at 117% above its 5-year average PE multiple and a "hold" rating, Amgen (AMGN) still has strong upside after assuming for multiples contraction. The same goes for Pfizer (PFE), which is roughly at its 5-year average PE multiple. Even though Pfizer is preferred on the Street, I find greater upside for Amgen based on my DCF model.
From a multiples perspective, Amgen is the cheaper of the two. It trades at a respective 16.7x and 10x past and forward earnings, while Pfizer trades at a respective 19.1x and 9x past and forward earnings. On the other hand, Pfizer offers a dividend yield that is double that of its competitor at 4.2%.
At the fourth quarter earnings call, Amgen's management noted a favorable close to 2011 and several catalysts for this year:
"As you've seen from our results for the fourth quarter, we ended the year with momentum, and we expect 2012 to be even stronger. I'll touch on some of the highlights. We entered 2012 with our Neulasta franchise growing, with Enbrel maintaining its market leadership and more stable outlook for EPOGEN, particularly now that we have long-term contracts in place. Prolia and XGEVA are obviously the important part of our outlook for 2012 and beyond. And we will build on the solid foundations that we have established for these brands with launches expected in new countries throughout 2012. We are obviously looking forward to the upcoming ODAC review of XGEVA for bone mets prevention, but I think it's important to emphasize the early progress that we've made and the biggest opportunity for XGEVA, which is with patients whose cancers have already spread to bone. In this setting, XGEVA is both driving the growth of the market and taking share, a trend which we expect to continue".
The only problem is that Xgeva appears to not have demonstrated clinical benefits for non-met high-risk CRPC patients. Accordingly, many analysts are doubting whether Xgeva will win approval. This prostate cancer bone met prevention production was estimated to have $5 accretion to shareholder value. On the other hand, fourth quarter was impressive in light of sales stabilization for Epogen and traction for Prolia. Furthermore, shortcomings of Xgeva are likely to be offset by strong blinatumomab Phase II data.
Consensus estimates for Amgen's EPS forecast that it will grow by 13.5% to $6.05 in 2012, and then by 10.7% and 12.5% in the following two years. Modeling a CAGR of 12.3% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $95.77, implying 42.2% upside.
Pfizer had solid performance during the fourth quarter with operational growth of 12% in emerging markets. This shift over to greater exposure in high-growth regions is doubly attractive in light of how Pfizer has multiple blockbuster drugs in its portfolio. The partnership with GlaxoSmithKline (GSK) will also drive a sustainable stream of free cash flow, as cuts in unnecessary R&D drive up margins. On the other hand, the expiration of Lipitor's exclusivity as competitive pressures loom against other drugs present headwinds for top-line momentum. Setbacks to several high-profile drugs are further preventing investor entry.
Consensus estimates for Pfizer's EPS forecast that it will decline by 1.7% to $2.27 in FY2011 and then grow by 3.1% and 3.8% in the following two years. Assuming a multiple of 12x and a conservative FY2012 EPS of $2.31, the rough intrinsic value of the stock is $27.72, implying 31.7% upside.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMGN, PFE over the next 72 hours.
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