Amy Raskin, CIO, Chevy Chase Trust Illumina Inc. ILMN-Q WEAK BUY Feb 10, 2025

80% of the world's genomic sequencing equipment runs on their machines. Strong cash flows, but earnings are a mess because they are spending on a big acquisition. But they have increased the board, which is good, and the company is well-positioned. The CEO resigned a few weeks ago and there's infighting about that acquisition.

ILMN has been 'distracted' with its fight with activist investors, and its CEO has resigned as fall-out. But we think this is largely reflected in the price now. Illumina will need to regain trust in its ability to deliver on its longer-term goals after initial 2023 guidance for operating margin and EPS fell far short of consensus, which has since been taken down even further. Expectations may have been too frothy after Illumina announced new products and a solid longer-term financial framework at its Genomics Forum and investor day. The reduced outlook accounts for issues in China and the ramping up of its NovaSeq X launch, on top of depressed spending. Consolidated operating margin is forecast at 5% with Grail's dilution, vs. 20% for the core businesses. Top line sales rose just 1% in 2022 after generating an outsized 40% gain in 2021, and is expected to remain flat in 2023. Other components modest pressure from currency. All-in, not so great. But considering its strong market share, global exposure and solid history, we think it deserves a few more quarters. This year has been most unusual. EPS is expected to nearly triple over the next two years, and this (if it occurs) should get things going again. 
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The CEO was a victim of the shareholder activist revolt, and the lawsuits are not material in any way, in our view (in fact, one doesn't even use the right company name, having copy/pasted from another lawsuit). We do think the company's dominant market share and robust technology win win out in the end. EPS (adjusted), based on consensus is expected to nearly triple next year. We are also encouraged that ILMN in 2017 received a takeover offer (from Thermo Scientific) at about 40% higher than current levels. Since then sales have nearly doubled and it has been very profitable (except for a loss expected this year). 
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It missed several quarters. Is down 43% this year, though up 4.1% today. Today's buyers are wrong.

It had many post-Covid troubles, but new management is fine, and last week shares jumped when they spun off their cancer-testing business.

This is not the typcial spin off scenario. ILMN was forced to divest GRAIL after many legal battles with  EU regulators and the FTC. The issue was antitrust relatated with the FTC saying that the, "acquisition of Grail will curb competition in the cancer-testing market." Spin offs typically act well, however, this is not a typical scenario. Being such a newly listed company that is not yet profitable, we would wait for more financial information before considering investing in GRAIL.
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