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Bear of the Day: Illumina (ILMN)

Kevin Cook

Illumina (ILMN) is the $45 billion leading developer of life science tools and integrated systems for large-scale analysis of genetic function and variation. Their technology is responsible for generating more than 90% of the world’s sequencing data.

 

Serving customers in the research, clinical and applied markets, their products are used for applications in the life sciences, oncology, reproductive health, and agriculture. 

 

You may have experienced Illumina technology if you ever ordered a DNA testing kit from a company like 23andMe or Ancestry.

 

A Shift in the Diagnosis

 

In May, ILMN was a Zacks #2 Rank because analysts were raising estimates after another beat-and-raise quarter and I was telling investors to keep buying shares under $310 because I believed strongly they were headed back to $350. 

 

Long from $288 in my Healthcare Innovators portfolio, thankfully we took our profits up there in June as I saw limited upside with the average Wall Street price target near $360.

 

Then on the evening of July 11, Illumina pre-announced disappointing Q2 revenues and forward guidance. From Bloomberg...

 

Illumina reports preliminary Q2 revenue $835M, consensus $888.18M

 

Illumina lowers FY19 revenue view to up 6% from up 13%-14%, consensus $3.77B

 

"We are obviously disappointed with our second quarter financial results. Our preliminary analysis suggests that these challenges are transitory and do not reflect a macro change to the fundamentals of our business," said Francis deSouza, president and CEO. "Despite our shortfall this quarter, we remain as enthusiastic about the long-term growth prospects for our markets as we have ever been, and are committed to setting the industry's bar for consistency and execution in the dynamic and rapidly growing world of genomics."

 

This negative surprise took shares down 16% the next day on heavy volume of 8.5 million shares.

 

Most analysts quickly revised their estimate models and stock price targets lower in response, with the average Wall Street PT now below $320.

 

Here's a snapshot of the current growth outlook for both revenues and profits...

 

 

The current year EPS projection fell 5% from $6.68 to $6.34. And next year's estimate dropped slightly less from $7.66 to $7.34.

 

Obviously the biggest blow was watching revenue growth get slashed in half.

 

In the company statement, management explained that its Q2 results were impacted by lower than expected revenue associated with population genomics initiatives, including a sizeable sequencing systems and consumables purchase that did not close as expected in the second half of June. Illumina said it now expects the purchase to close "later in 2019."

 

Illumina also pointed to lower than expected revenue associated with ongoing weakness in the direct-to-consumer market, and lower than expected revenue associated with its non-high-throughput sequencing systems and consumables. While softer than anticipated, Illumina said NextSeq system and consumables shipments grew both sequentially and year-over-year, and average pull-through per NextSeq system was within Illumina’s target range.

 

Many analysts remain bullish on ILMN and see the stock drop as a better buying opportunity. I happen to agree as it is the premier player in this space and will stand to gain the lion's share of a market of literally billions who will need or want genetic testing at least once in their lifetime.

 

Meanwhile, I'm banking on their "lil brother" in the space, Invitae (NVTA).

 

To learn more about Illumina and its unique products in a giant market, be sure to click on my May article linked above. The company is expected to report its full Q2 results on Monday July 29 after the market close.

 

While investors and analysts will get a lot more clarity at that conference call next Monday, we also want to see the estimates stop heading down and start heading back up to make us buyers again with conviction. The Zacks Rank will let us know.

 

Disclosure: I own NVTA shares for the Zacks TAZR Trader portfolio.

 

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