Inconclusive Results for This Genome Sequencer

The market might not have had much reaction to Illumina's (NAS: ILMN) solid quarterly results, but at least one analyst saw a bright silver lining. Credit Agricole switched its opinion from sell to outperform the day after Illumina released its second-quarter report. These new developments seem to support (at least in part) Illumina's hard-line resistance to Roche's thus-far failed takeover bid.

Let's take a look at the latest results to find out what's in store for Illumina going forward.

What the numbers tell you
Illumina suffered both sequential and year-over-year declines on the top and bottom lines, but a major part of the dip in net income came from a one-time impairment charge. Without that charge, Illumina's non-GAAP earnings beat estimates. The company also raised its full-year earnings guidance range by ten cents a share.

Here's a quick snapshot of Illumina's recent earnings history:

Sources: Morningstar and company earnings release.

There hasn't been a lot of positive momentum since Illumina's wings were clipped a year ago. Now that its contentious buyout battle seems to be over, Illumina's share price is retreating to pre-offer levels, well below its year-ago closing price:

ILMN Total Return Price Chart
ILMN Total Return Price Chart

ILMN Total Return Price data by YCharts

Planning ahead
There's clearly serious competition to bring sequencing to the masses, and Illumina's latest research and development push could be necessary to get ahead of Life Technologies' (NAS: LIFE) purported $1,000 genome sequencer (the machine itself costs much more), due out by the year's end. Complete Genomics (NAS: GNOM) and Pacific Biosciences (NAS: PACB) have been left behind in the R&D race by comparison:

ILMN R&D Expense Chart
ILMN R&D Expense Chart

ILMN R&D Expense data by YCharts

It's unlikely you'll see either company catch up now -- note that this chart is only current for the first quarter, and doesn't include Illumina's recent spending increase (largely the result of a one-time impairment charge). But spending more on research isn't a complete solution for Illumina's problems. Even after its share price has dwindled, the company's P/E remains quite high. At 64, it's more than three times as dearly valued as Life Tech.

Illumina's latest news didn't appeal to Sequenom (NAS: SQNM) shareholders much. The small Down-syndrome-testing company, which runs its tests on Illumina sequencing machines, has lost 5% today. It's one of the clearest companion plays on the market, as a market shift toward Life Tech sequencers (or other nascent technologies) might force a painful, but necessary, redevelopment process.

Illumina's hardly sitting back. This quarter saw the release of several new products and services, and the company's conference call promised several more in the near term. One notable release was the Nextera XT DNA sample preparation kit, which the company promises will offer greater speed and ease of use than any competing technology currently on the market. Overseas markets were also strong, in spite of Europe's ongoing problems. Brazilian sales were up in a big way, and Chinese orders continue to impress.

Earnings per share of $1.50 to $1.60 this year, as the company now expects, would be a significant upgrade over 2011's EPS. With trailing-12-month EPS sitting at $0.66, that sort of growth in the second half would do much to bring Illumina's P/E closer in line with Life Tech's, and if similarly positive expectations arise for 2013, it might be enough to get this stock to soar again. However, there isn't much yet showing shareholders that Illumina's got the forward momentum to make it happen.

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