Illumina (ILMN – Free Report) , a leading developer of next-generation tools for the large-scale analysis of genetic variation and function, saw its shares plunge over 25% in the after-hours session on October 10 when the company warned that Q3 revenue would be $18-23 million lower than expected as its sequencing instruments sales down were down 26%.
This was the second such pre-announcement of weaker numbers this year and investors responded quickly by dropping the stock from $185 to $135. Analysts took a little more time to respond with revisions to their estimate models, causing the stock to become a Zacks #5 Rank (Strong Sell) the following week.
The downward EPS revisions took the 2016 consensus down 4.8% from $3.53 to $3.36, representing only 1% growth for the full year.
And while 2017 estimates only dropped 4.6% from $4.11 to $3.92, maintaining double-digit EPS growth, the uncertainty about future sales and profits spreading out to next year could increase with only 8 analysts providing revisions thus far.
“Sell” With Margin Pressure Ahead
One investment bank analyst in particular was actually very quick to announce their new stance. On October 11, Paul Knight, CFA, of Janney Montgomery Scott dropped ILMN to a “Sell” rating with a $125 price target. Here’s what he had to say…
Lack of visibility in whole genome sequencing sales and the continuing investment in diagnostics with Helix and Grail will constrain profitability. Our Fair Value of $125 is based on a 21x multiple of 2017 EBITDA per share $5.95. With diminishing revenue and operating visibility, we believe the multiple paid compared to historical (28x) and LS Peers (14x) will continue to converge.
Knight explained further that in addition to the deceleration in revenue, “the diagnostics businesses take 6-9 years to develop significant commercial traction and the consequent investment in Helix and Grail will limit margin expansion at the company.”
Bright Century, Cloudy Decade
Illumina provides proprietary life science tools like microarrays to support genetic analysis for genomic research centers, academic institutions, pharmaceutical and biotech companies, and clinical labs.
The company’s tools will provide information that could be used to improve drugs and therapies, customize diagnoses and treatment, and cure disease. Illumina is developing a comprehensive line of products that can address the scale of experimentation and the breadth of functional analysis required to achieve the goals of molecular medicine. In this sense, they have big, long-term goals.
With many life sciences and genetics “tools” companies, the future seems bright. But the payoffs are often distant, or at least choppy. Illumina shares are now over 40% off their all-time high of $240 from July 2015.
And after warning twice this year, investors may be less likely to give third chances to management guidance. Until the estimates start turning back up, its time to let ILMM shares settle into a new value area. The Zacks Rank will let you know.
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