Slowing Growth, High P/E

Illumina (ILMN), the market leader in gene sequencing systems which determines the DNA of an organism, was unable to breakout this month as last qtr’s earnings release failed to impress investors.

Profit growth was 40% last qtr, on sales growth of just 21%. Great results. Here’s what I didn’t like:

• The company had been beating the street by 10 cents to 21 cents the prior three qtrs, and only beat by 3 cents last qtr.
• Estimates for the next 3 qtrs are for 8%, 6% and 10% profit growth even though growth is expected to be 18% during that time.
• The stock has a P/E of 64.

Illumina is king of gene sequencing, making machines that are state of the art and also lowering the prices of its older units. It basically controlls the market, which means sales and profits should remain strong for years to come. But I just don’t feel the stock should be worth this much.

One Year Chart

Profitability was fantastic this past year as the company came out with its new HiSeq X machine which is better and cheaper than the older HiSeq. But now we have tougher comparisons ahead, and since ILMN only beat by 3 cents last qtr, we could be looking at 10% profit growth the next few qtrs.

Note the stock sells for 64 times earnings even though the estimated long-term profit growth rate is 21%. Sure Illumina is king of ggene sequencing machines, but 64 times profits is rich when profit growth isn’t so hot.

Fair Value

I’m taking my Fair Value P/E down from 55 to 45 as we could be looking at a slower profit growth period until the June qtr next year. That’s a long time. With the shares selling at a recent price of $221, I feel ILMN stock is overvalued by 30%. But to be honest with you, I’ve missed my opportunity to buy this stock at an expensive price in the past and have been left behind as the shares went much higher.

Sharek’s Take

Illumina’s is one of the best stocks I don’t already own. It’s a market leader in an industry with a bright future. But with profit growth set to slow, I feel the current price is too much to pay. I’ll keep ILMN on the radar and try to get some shares below $200.