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Sequenom Valuation Is Attractive

|Includes: Sequenom, Inc. (SQNM)

Sequenom ($SQNM) has become undervalued over the past two years due some very valid concerns. Those reasons include:

  1. Erratic and confusing revenue trends.
  2. Declining accession levels in the US.
  3. Significant cash burn leading to the potential for a required dilutive capital raise.
  4. An IP battle that has no clear end in sight and an increasing concern that no IP moat will survive.

These concerns grew to the point last fall when the stock price dropped well below $2.00 per share and prompted my article suggesting that the bottom was in the rearview mirror. Rather than write another article analyzing the March 2014 quarter, I'm going to post a series of blogs that will help explain why some of the above concerns are waning.

In this macro environment where the $IBB dropped around 24% in two months, there is an aggressive rotation away from companies with no earnings. The market is running to safety, relentlessly selling off small cap bios that have similar characteristics to SQNM

  • No earnings.
  • Negative cash flow.

Consider this comparison

  • Feb 25, 2014 IBB close 273. Currently 228 down 16%.
  • Feb 25, 2014 SQNM close $2.40. Currently $2.81 up 17%.

Sequenom has been characterized by the market as a rotation to safety target as can be clearly seen on "no news" days where the IBB is selling off and SQNM is up. Why? My belief is that the above concerns are dissipating and investors are aware of the low valuation of Sequenom relative to both the IBB and the NIPT market opportunity. Consider the following table

Valuation Trend
  Mar-14 Dec-13 Sep-13 Jun-13 Mar-13
Market Cap (NYSE:M) $ 327 $ 277 $ 265 $ 353 $ 492
Enterprise Value (M) $ 472 $ 424 $ 414 $ 504 $ 647
           
EV/TTM revenues 2.8x 2.6x 3.1x 3.9x 5.7x
EV/NTM revenues 1.9x 1.9x 2.0x 2.7x 3.8x

Notes:

  1. Market cap is based upon the closing price 3 days after earnings announcement for each quarter.
  2. Enterprise value represents market cap plus long term debt including current portion.
  3. TTM is trailing twelve months revenues on an actual basis.
  4. NTM is next twelve months revenues. Actuals are used for periods reported. Street consensus used for future periods.

As you can see in this table, Sequenom is not in the same category as the stocks selling off. These high flyers include the 3D printers, social internet sites, E-commerce and almost all biotech companies. Sequenom is still valued at less than 2x forward revenues and those forecasted revenues exclude any contribution from the yet-to-be released low risk NIPT that management has indicated will be released this year. Completely eliminating the aforementioned concerns should bring this valuation closer to 3x forward revenues.

Disclosure: I am long SQNM.