Illumina (ILMN) is one of the top stocks I don’t already own. The company makes gene sequencing systems, which determines the DNA of an organism.
This year Illumina introduced a new high-end system HiSeq X, which is better and cheaper than their previous high-end system HiSeq. The big difference is the new HiSeq X has 6x the scanning speed of the old model, and sequences 5 genomes a day compared to one for the HiSeq. Also, the HiSeq costs only $1000 to sequence a genome and has come down from $100 million in 2001 and $100,000 in 2009. The difference between the two is startling. Think your current smart phone vs. your old flip phone you had back in 2006.
The price of the HiSeq X is $10 million each, and if you’re running a company or school you need to buy ten of these, so that’s $100 million. If that’s too steep, then the new low-end model can do what the old high-end model did and will set you back a modest $250k. ILMN did $1.4 billion in sales last year, may do $1.9 billion this year, but the difference in the technology kinda makes you buy the new model, just like when you upgraded from a flip phone to a smart phone.
One Year Chart
The Illumina story sounds great. Why don’t I own the stock? because management has been playing games with analysts. Not bad games, just playful ones. Like last quarter the consensus was ILMN would make 56 cents. Then the company unexpectedly made 77 cents. Honestly? Like they didn’t see that coming? Like they got a rush order of HiSeq X’s from a customer who ordered through Amazon and got the free two-day shipping? I think management knows exactly how much it will make well in advance, and is now playing the underpromise to overdeliver game.
Looking at the one-year chart, ILMN has a P/E of 60 when looking at 2015 estimates, vs an Est. LTG of only 24% per year. These estimates just jumped from $2.81 to $3.17 in the last quarter too, so I bet these will head towards $4 as we still have five quarters to go before 2015 is in the books. I like how quarterly profit growth just jumped to 71% and next quarter is expected to be the same. I bet the 2QtrsOut estimate is too low as well.
Fair Value
I did these tables and charts on 10/28 when ILMN was $191. Today, 12/10, the stock is $188. Although ILMN is growing fast now, it hasn’t been a rapid grower in many recent years. Profit growth averaged 23% a year from 2010 through 2013. Also the Estimated Long Term Growth Rate is just 24%. So I don’t know if I can justify a 60 or 70 P/E on this stock. My Fair Value is 45 times earnings, which is a price target of $143 next year.
Sharek’s Take
Illumina’s a great stock and an even better company. It is the only one to consider for gene sequencing machines. The newest model is so much better profits are bound to be flowing through the door, even though management isn’t as forthcoming as it should be in admitting so. But for me the P/E of 60 seems to high a price to pay right now. The stock market is a little high and I think it could be starting to correct as we speak. If ILMN drops I’m ready to buy in. This is one of the top 5 stocks on my radar.
View the Earnings Table here. View the Profit History here. View the Ten Year Chart here.
