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In the second round of the Growth Portfolio playoffs we have #10 seeded Polaris Industries Inc. (PII) taking on #2 seeded Illumina, Inc. (ILMN). Polaris designs, engineers and manufactures off-road vehicles including all-terrain vehicles and side-by-side vehicles for recreational and utility use, snowmobiles, and on-road vehicles including motorcycles and small electric vehicles. Illumina is a developer and manufacturer of life sciences tools and integrated systems for the analysis of genetic variation and function.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

ILMN

21Oct13

0.45

0.40

0.35

0.34

PII

22Oct13

1.64

1.61

1.10

1.05

Illumina is up 167.91% in the past year while Masco is up 69.32% excluding dividends (up 70.61% including dividends), and are beating the S&P 500, which has gained 25.33% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner, which will go on to play in the next round of the playoffs for the Growth Portfolio Super Bowl and face the winner of the battle between Netflix (NFLX) and Visa (V).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Illumina carries a 1-year forward-looking P/E ratio of 55.73, which is expensively priced for the future right now while Polaris' 1-year forward-looking P/E ratio of 21.82 is currently fairly priced. Game One goes to Polaris.

1-yr PEG

This metric is the trailing twelve-month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five-year estimated growth rate, however I like to use the one-year growth rate. This is because as a capital projects manager who performs strategy planning for the research and development division of a large-cap biotech company, I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one-year forecast as opposed to a five-year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Illumina is currently at 8.61 based on a 1-yr earnings growth of 16.06% while Polaris' 1-yr PEG ratio stands at 1.23 with a 1-yr growth rate of 23.29%. Polaris beats Illumina out in Game Two to take a two game lead.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one-year earnings growth projection as opposed to the five-year projection based on what I discussed in the PEG section above. Illumina has a projected EPS growth rate of 16.06% while Polaris sports a growth rate of 23.29%. Polaris manages to win Game Three to almost clinch the series.

Dividend Yield

Dividend yield is a no brainer; it must be had in a portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve-month earnings. Unfortunately, Illumina doesn't pay a dividend while Polaris pays a yield of 1.16%. Polaris is able to sweep the series against the heavily favored Illumina.

Conclusion

Although Illumina was swept against Polaris, Illumina is still a great company with great long-term story. Both companies have excellent short-term and long-term earnings growth potential, hence the reason why they are in my growth portfolio. Illumina is just extremely expensive as all biotech plays normally are. After beating Illumina, Polaris will advance to the next round of the playoffs and await the victor of the Netflix/Visa matchup.

(click to enlarge)

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Growth Portfolio Playoffs Round 2: Illumina Vs. Polaris