Expect Upside in Illumina Following Brilliant Deutsche Bank Note

Includes: AFFX, ILMN
by: Notable Calls

Deutsche Bank is out with a marvelous, absolutely marvelous call on Illumina (NASDAQ:ILMN) saying that over the last several weeks they have attended a series of management meetings and industry conferences, while also speaking with customers of ILMN's genetic tools, leading to an improved understanding of the company's growth profile. The firm now also believes they have an increased handle on the company's litigation and contend that there is a general misperception across the Street. Therefore, they have reconstructed their investment thesis and updated their financial estimates to reflect more optimistic view of ILMN's growth profile.

Main takeaways:

- Next-gen sequencing opportunity could be significantly larger than current estimates. The upside potential with Solexa' next-gen sequencing tech has been a strong success so far but upside potential remains significant. Prior to this technology, the ability to sequence a genome was minimal due to the time and cost restraints it involved. But with the introduction of new technology, the potential applications for this technology are limitless

- Illumina continues to innovate in genotyping at a remarkable rate: During 2006, Illumina introduced 8 new products to the market. ILMN is close to launching its Human 1M chip, which will provide further genetic coverage than any other product it has ever offered. Checks show customers are anxiously awaiting this product.

- One major factor that has slowed some of Illumina's recent momentum has been the overhang related to the Affymetrix litigation. Yet, according to DB, the impact is completely and utterly misunderstood by the Street. Even in the event of a large royalty (15%), the impact to total ILMN revenues is not as large as it seems (40% to 50% of ILMN genotyping revenues would not be subject to a future royalty.)

Deutsche has increased their FY08 revenue estimate from $410.0mn to $450.0mn and EPS estimate from $0.90 to $1.35 (no longer includes impact of royalty to AFFX). For FY09 they have increased their revenue estimate from $512.5mn to $585.0mn, while increasing EPS estimate from $1.30 to $1.60. Maintains Buy and ups tgt to $48 from $39.

Notablecalls: This is the kind of call that makes the tiny hairs on the back of my neck tingle, the kind of call that makes me wish I had a trading account so I could pull the trigger on a ton of ILMN on open and watch it climb over the next couple of weeks.

Calls like this don't come by often. I think JPM's call on VSEA from March 21 or maybe RayJay's on GDP from April 30 deserve to stand in the same category.

Illumina is a fascinating growth story. I remember ILMN started its climb just as AFFX started failing. People started to talk about how ILMN's products were so much better than AFFX's. While it looks like AFFX is getting its act together, ILMN has powered way ahead of them.

Actionable call alert!

Disclosure: Author has no position in ILMN

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