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Illumina (ILMN): Stock Poised to Beat Q1 Earnings

Zacks Equity Research

Illumina Inc.ILMN is expected to report first-quarter 2016 financial numbers on Apr 19, after the market opens.

Last quarter, the company posted a negative earnings surprise of 1.22%. However, Illumina’s earnings outpaced the Zacks Consensus Estimate in 3 of the past 4 quarters, with an average beat of 7.25%. Let’s see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that the company is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Illumina has an Earnings ESP of +1.28%. That is because the Most Accurate estimate is 79 cents while the Zacks Consensus Estimate is pegged lower at 78 cents. This is a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Illumina has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Illumina’s Zacks Rank #3 and +1.28% ESP makes us confident of an earnings beat at the company.

What is Driving the Better-than-Expected Earnings?

Notably, Illumina’s first quarter of 2016 commenced with the launch of a liquid biopsy company – GRAIL. Facilitated by Illumina’s next-generation sequencing technology, GRAIL is aimed at developing a pan-cancer early detection screening test by directly measuring circulating nucleic acids in the blood. 

According to Illumina, GRAIL occupies a unique niche in the sequencing market with a pan-cancer assay target for screening. During the first quarter, management remained engaged in transferring its ctDNA programs, the MSK partnership, and the employees working on these projects to GRAIL.

Illumina also launched the MiniSeq sequencing system, which is an affordable sequencer that allows virtually any laboratory to adopt NGS, regardless of sample volume. As per management’s expectation, the company must have started the shipment of this product during the first quarter.

Illumina has also joined forces with Bio-Rad to develop the most comprehensive next-generation sequencing (NGS) workflow for single-cell analysis. This partnership is expected to allow Illumina capture a larger share in the single-cell NGS market.

In February, Illumina had signed four separate biobanking deals with Vanderbilt University, University of Colorado at Denver, Partners HealthCare and Montreal Heart Institute to advance personalized medicine and improve health care. Next, Illumina entered into a partnership with Genomics England to develop a platform and knowledge base that can be used to improve and automate genome interpretation. All these developments are expected to boost the company’s first-quarter 2016 results.

Besides, we are encouraged by the positive market reaction to the company’s recent claim for the CE mark on expanded use of VeriSeq NIPT Analysis Software to facilitate implementation of NIPT testing by clinical laboratories.

On the flip side, the company’s previously committed investments in Helix and GRAIL as well as head count additions from strong hiring momentum coming out of 2015 are expected to result in a sequential rise in operating expenses of $20 million in the first quarter. Moreover, the ongoing shift of one of the company’s large customers to testing in-house is expected to dent service revenues but increase product sales.

Also, a lack of customer readiness is expected to reduce the company’s shipments of Hiseq sequencing system to below 20 in the first quarter. However, the company expects to witness stability in MiSeq and NextSeq pipelines.

Despite these headwinds, the stronger-than-expected fourth quarter results have led the company to expect flat to slightly higher revenue sequentially, in the first quarter.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

PAREXEL International Corporation PRXL, earnings ESP of +2.25% and a Zacks Rank #1.

Gilead Sciences Inc. GILD, earnings ESP of +1.65% and a Zacks Rank #1.

Zimmer Biomet Holdings, Inc. ZBH, earnings ESP of +1.55 % and a Zacks Rank #2.

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