ILMN 01/29/13

We entered a trade to buy ILMN, which will expire by 2/12 or if we hit the target of 56.99 or the stop of 49.89.  This works out to 11.9% potential reward and 2% risk, so almost 6:1.  

ILMN is one of my watchlist names.  Honestly, it's a pretty tough company fundamentally.  What they do is participate in the rapidly growing market of gene sequencing, but they also have some legacy business.  They have a few competitors, but seems to maintain leading share.  Their margins are very high - so is their valuation!  The stock trades at 30PE or so and about 5.5X sales.  My one-year target on the stock is 62 based on achieving 6.5X sales for 2013, but the stock will likely be a lot higher or lower. Keep in mind that Roche has tried to buy them unsuccessfully.

The company just reported.  Their sales guidance was good, but earnings a disappointment.  The reasons for the lower 2013 earnings than previously expected are an acquisition, R&D spending and some projects that will ultimately yield better margins hopefully.  My read is that the company doesn't care about near-term profitability as it does long-term success.  I watch sales as the key indicator.

The reason for the trade is simple:  This heavily shorted stock didn't go down on "bad" news of an earnings reduction for 2013.  The company guided $1.55-1.62, while the street had expected $1.72.  With a 30 PE and a .14 reduction, one might have expected the stock to fall by about 3 points.  Here's what I see:

As you can see on the 5-minute chart, the stock fell less than a point and has held the 50.40 lows from a few days ago.  Perhaps I moved prematurely by not waiting for it to clear 51 - we'll see.  

Let's look at the one-year:

Here you can see why I set my stop-loss at 49.89 - that was the opening price on that gap down in early January, when Roche apparently walked away and the company announced a dilutive acquisition.  As far as the 56.99 target, that would be a return to the highs of December as the stock gapped up on news of Roche interest again.  It was reported at the time that Roche was considering paying $66.

Posted to The Analytical Trader on Jan 29, 2013 — 3:01 PM
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