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Here's Why You Should Hold on to Illumina (ILMN) Stock for Now

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Zacks Equity Research
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Illumina, Inc. ILMN has been gaining from sequential segmental growth and increased demand for its products. The company’s focus on partnerships and worldwide expansion to drive growth are expected to contribute further. However, stiff competition and a tough funding environment remain concerns.

Over the past year, this Zacks Rank #3 (Hold) stock has gained 9.8% compared with the industry’s growth of 6.8% and the S&P 500’s 17.7% rise.

The renowned life sciences company, which has a market capitalization of $53.16 billion, provides tools and integrated systems for analysis of genetic variation and function. The company projects 7% growth for the next five years and expects to maintain its segmental performance. The company surpassed estimates in three of the trailing four quarters and missed the same in one, the average surprise being 13.92%.

Let’s delve deeper.

Worldwide Expansion to Drive Growth: We are upbeat about improvement in Illumina’s EMEA revenues in the third quarter of 2020 due to strength in sequencing consumables resulting from a strong rebound in both clinical and research customers. Sequential growth in revenues was also registered in the Americas in the quarter, driven by both research and clinical customers as laboratories are gradually reopening and an increase in clinical activity is being observed. Further, revenues from China grew sequentially due to strength in instrument placements.

Strategic Partnerships: Illumina’s expansion strategy also buoys optimism. The company, this month, announced a risk-sharing agreement with Harvard Pilgrim Health Care to make whole-genome sequencing (“WGS”) available to eligible Harvard Pilgrim members. Notably, this program will be effective from Jan 1, 2021 and will leverage WGS to enable faster diagnosis of genetic diseases in children. Other notable partnerships inked by Illumina are with IDbyDNA (in March) and Roche.

Illumina had also announced its entry into a definitive agreement with healthcare company GRAIL in September, under which Illumina will acquire the latter for cash and stock consideration of $8 billion upon closing of the transaction. Another notable buyout by Illumina was that of cloud-based software company BlueBee (in June).

Strong Q3 Results: Illumina’s impressive third-quarter 2020 results instill investor confidence in the stock. The gradually improving business conditions buoy optimism on the stock. Sequential improvement in segmental revenues across geographies looks impressive as well. Additionally, the release of NovaSeq 6000 v1.5 reagents to enhance deeper genomic discoveries augur well for the stock.

Downsides

Stiff Competition: Illumina operates in a highly competitive market, with several biggies already enjoying significant market share, intellectual property portfolios and favorable regulatory developments. To gain a competitive edge, Illumina must upgrade its organization and infrastructure appropriately and develop products with superior throughput, cost and accuracy.

Tough Funding Environment: Illumina’s exposure to the U.S. government funding was less than 30% in 2015. Budgetary pressure may result in reduced allocations to government agencies that fund research and development activities. Any shift from the funding of life sciences research and development, or delays surrounding the approval of government budget proposals, may cause Illumina's customers to delay or forego purchases of its products.

Estimate Trend

Illumina has been witnessing a negative estimate revision trend for 2020. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved south by 1.8% to $4.31.

The Zacks Consensus Estimate for fourth-quarter 2020 revenues is pegged at $870.1 million, suggesting a decline of 8.7% from the year-ago reported number.

Key Picks

Some better-ranked stocks from the broader medical space are Hologic, Inc. HOLX, IDEXX Laboratories, Inc. IDXX and Laboratory Corporation of America Holdings LH or LabCorp.

Hologic’s long-term earnings growth rate is estimated at 17.4%. The company presently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

IDEXX’s long-term earnings growth rate is estimated at 15.8%. It currently carries a Zacks Rank #2 (Buy).

LabCorp’s long-term earnings growth rate is estimated at 10.1%. The company presently carries a Zacks Rank #2.

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Illumina, Inc. (ILMN) : Free Stock Analysis Report
 
Hologic, Inc. (HOLX) : Free Stock Analysis Report
 
Laboratory Corporation of America Holdings (LH) : Free Stock Analysis Report
 
IDEXX Laboratories, Inc. (IDXX) : Free Stock Analysis Report
 
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