Stock Preacher

Illumina Inc. (Nasdaq: ILMN)

Illumina Inc. (ILMN) is a developer, manufacturer and marketer of integrated systems for the large-scale analysis of genetic variation and biological function. The Company provides a comprehensive line of products and services that serve the sequencing, genotyping and gene expression markets. It also, develops and commercializes sequencing technologies used to perform a range of analyses, including whole genome re-sequencing, gene expression analysis and small ribonucleic acid (RNA) analysis.

The Company sells the Genome Analyzer and related reagent into the sequencing market. This instrument uses reagents based on the Company’s proprietary sequencing-by-synthesis (SBS) biochemistry. The BeadArray technology combines microscopic beads and a substrate in a proprietary manufacturing process to produce arrays that can perform millions of assays simultaneously, enabling large-scale analysis of genetic variation and biological function in a unique high throughput, cost effective and flexible manner. ILMN sells two primary families of products based on this technology, the GoldenGate genotyping products and the Infinium product family. Both products can be read on the Company’s proprietary scanner, the iScan system.

ILMN’s customers include genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies.

The Company was founded in 1998 and is headquartered in San Diego, California.

Source: Reuters.com, SEC Filings.

Financial Summary

For the third quarter of 2009, the Company reported revenue of $158.4 million, a 5% increase over the $150.3 million reported in the third quarter of 2008. Product revenue was 150 million, growing 7% over the prior-year period led by significant growth in sequencing products. Consumables revenue for the quarter was 87 million compared to 90 million in the third quarter of 2008, which represents a year-over-year decline of 4%.Gross margin in the third quarter of 2009 was 67.6% compared to 62.0% in the comparable period of 2008. Excluding the effect of non-cash charges associated with stock compensation and the amortization of intangibles, non-GAAP gross margin was 69.5% for the third quarter of 2009 compared to 64.6% in the prior year period. ILMN earned $17.1 million, or 12 cents per share, compared with a year-ago loss of $10.1 million, or 8 cents per share. Excluding certain one-time charges but including stock-based compensation expenses, its profit came to 17 cents per share in the latest period.

The Company ended the third quarter with $815.4 million in cash and investments compared to $790.3 million as of June 28, 2009. ILMN generated $23.1 million in cash flow from operations during the third quarter of 2009 compared to $27.3 million in the prior year period. Depreciation and amortization expenses were $8.3 million and capital expenditures were $19.7 million during the third quarter.

For the fourth quarter of 2009, the Company expects revenues of $165 million and non-GAAP earnings per fully diluted pro forma share between $0.24-$0.25. This represents year-over-year growth of 3% in the fourth quarter. For fiscal 2009, it expects revenues of $651 million and non-GAAP EPS of $1.05-$1.06. ILMN expects gross margin percentage for the fourth quarter and the full year to be between 69% and 70%. According to Reuters Estimates, analysts are expecting the Company to report revenues of $176 million and non-GAAP EPS of $0.20 for fourth quarter of 2009 and revenues of $663 million and non-GAAP EPS of $0.81 for fiscal 2009.

Shares of ILMN slipped after the Company reported third-quarter results and 2009 guidance below analyst estimates. After-hours, the stock lost $8, or nearly 20%. The Company’s shares have ranged from $18.82 to $44.07 over the past year.

Analyst Consensus

Eighteen analysts polled by Thomson Reuters consider that ILMN will “Outperform”.

Source: http://markets.ft.com/tearsheets/analysis.asp?s=ilmn

Investment Highlights

In July, the Company delivered the first human genome sequenced under its personal genome-sequencing service to a customer. ILMN said that it generated more than 110 gigabases of data, sequencing the genome to more than 30-fold coverage, at its CLIA-certified laboratory, which is also accredited by the College of American Pathologists, using its Genome Analyzer technology. Data analysis showed 300K novel SNPs in the genome that have not been documented elsewhere. This is the first service in the industry to offer complete coverage of the human genome sequence for under $50,000.

In May, the Company revealed a new product for DNA Analysis: the HumanOmni1-Quad BeadChip. With more than 4 million data points on a single BeadChip, this array includes up-to-date content for all major classes of genetic variation for the study of human disease. The BeadChip utilizes tagSNPs from all three phases of the International HapMap Project and offers coverage of known regions of copy number variation (CNV) and SNPs of known disease association. In addition, the HumanOmni1-Quad BeadChip is the first commercially-available product to offer content derived from the 1,000 Genomes Project. The format of the HumanOmni1-Quad BeadChip supports simultaneous genotyping of four samples which increases throughput and decreases the per sample price.

At the 59^th annual meeting of the American Society of Human Genetics, the Company announced its 2010 roadmap for the Infinium whole-genome genotyping platform, offering products capable of analyzing up to five million (5M) variants per sample. These products will include the highest value content from the 1,000 Genomes Project selected through collaboration with leading researchers. This array content will facilitate testing new scientific hypotheses, including the impact of rare variants, CNVs, and other non-SNP markers on diseases and traits. Prior to releasing the 5M product, ILMN will release an intermediate 2.5M product that adds rare variants to the strong backbone of content currently on the HumanOmni1-Quad BeadChip.

ILMN recently launched cBot, a new standard for ease-of-use and sequencing workflow automation. cBot is a plug-and-play, user installable, fully automated system for amplification of sequencing libraries which reduces sample preparation time by 25% compared to the Cluster Station. Its automated design eliminates user intervention and enables clonal amplification to be performed in four hours with less than ten minutes of hands-on time. cBot innovations include ready-to-use, pre-packaged reagents, simple touch-screen operation, and browser-based remote monitoring. High quality results are assured by smart sensors that monitor instrument performance. The Company’s proprietary cluster generation process offers major advantages over competing emulsion PCR-based methods in terms of simplicity and hands-on time.

This summer, the Company launched GoldenGate Indexing, a high-throughput genotyping solution that utilizes multi-sample indexing technology. Researchers may now screen up to 16 times as many samples per reaction as the standard GoldenGate Assay, increasing throughput from 288 samples per day to greater than 2000, while decreasing total reagent consumption. This high-quality genotyping system includes automation control and positive sample tracking through an Illumina Laboratory Information Management System, creating a turnkey solution for low-complexity screening at an affordable cost per sample.

ILMN’s board of directors has approved a new stock repurchase program, authorizing the Company to repurchase in the aggregate up to $75 million of its outstanding common stock. The Company has terminated the $120 million repurchase program announced on October 24, 2008, after repurchasing an aggregate of $70.7 million of its outstanding common stock in 2008. Under the program authorized by its board of directors, any shares repurchased will be done so under a 10b5-1 trading program. The purchases will be funded from existing cash balances.

During the third quarter, only very limited stimulus funds were release to customers. In the fourth quarter, the Company experienced significant increase in grants activity for genome-wide association studies (GWAS), as well as custom content studies from both stimulus and related funding in the 2009 NIHB’s budget. The Company expects the GWAS market to revive by the middle of next year, and believes its array business will continue to grow, driven by the agricultural biotechnology market and custom projects. In addition, nearly $10 billion funds allocated to NIH under the American Recovery and Reinvestment Act of 2009 gave researchers the capability to buy capital equipment.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

ILMN is below its 13-day moving average. This bearish sign is even more significant because the moving average is also trending lower.

The MACD for the Company currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

ILMN’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally,  ILMN is trading near its lower Bollinger Band. This suggests that the stock price is low relative to its recent price action.

Comparative Analysis

Due to its strong market position, ILMN is traded with significant premium to peer P/E and P/S multiples.

The Company’s recent financial results were mainly hurt by three factors such as: a slowdown in genetic research; delays in disbursement of economic stimulus funds and weaker reagent sales due to manufacturing problems. However, the Company’s genotyping product portfolio is regularly updated with the latest content to provide customers with powerful analysis across populations and variant classes, all in one assay. ILMN has a strong position in the market and could receive a substantial benefit from stimulus money. The strong growth will create demand and as more money comes back into the market, this stock is poised for a run up.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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