ILMN Illumina Inc

Life Technologies (LIFE) is scheduled to release its first quarter fiscal 2011 results on Tuesday, April 26, 2011 after the market closes. The company is expected to earn 85 cents during the quarter on $920 million of revenues, according to the Zacks Consensus Estimate.

Previous Quarter Highlights

Life Technologies reported an adjusted EPS of 90 cents in the fourth quarter of 2010, surpassing the Zacks Consensus Estimate of 86 cents and 13% higher than 80 cents in the year-ago quarter. Growth in all the divisions of Life Technologies helped adjusted revenues for the quarter increase 7% year over year to $934 million, ahead of the Zacks Consensus Estimate of $928 million. Excluding the impact of currency, acquisitions and divestitures, revenues grew 5%.

Although revenues increased 7% during the quarter, EPS growth was higher by 13% due to an improvement in operating margin (up 50 basis points to 26.3%), lower interest expense (23.7%), a 58% rise in interest income, lower effective tax rate (21% versus 26.2%), partially offset by a 2.1% rise in the share count. While gross margin declined marginally by 40 basis points due to a minor impact from mix, improvement in operating margin was driven by acquisition-related synergies.

Life Technologies also provided its outlook for 2011. The company expects its organic revenues to grow in mid-single digits resulting in adjusted EPS of $3.80–$3.95.

Agreement of Analysts

Estimate revision trends among the analysts have been primarily on the negative side in the last 30 days. Among 17 analysts covering the stock, 8 have lowered their estimates for the first quarter without any movement in the positive direction. Moreover, 1 analyst lowered his/her estimate in the last 7 days. Maintaining the same trend, for fiscal 2011, 9 analysts have lowered their estimates with only 1 upward revision over the last 30 days. In the past 7 days, 2 analysts have lowered their estimates for fiscal 2011.

Life Technologies records approximately 10% of its revenues from Japan. As a result, the recent earthquake and devastating tsunami in this region is likely to affect revenues. The extent of the impact on the company’s revenue stream will become clearer following the results.

According to the company’s guidance, organic revenue growth in the first quarter of 2011 is expected to be in the low-single digits as the year-ago period recorded an exceptionally strong performance with 10% organic growth.

The robust performance in the first quarter of 2010 was a result of US and Japanese stimulus programs and the last installment of the Japanese Police order. Due to lower revenue growth and the impact of currency, earnings growth is expected to be flat to down 5% in the quarter. However, excluding the impact of currency, EPS is expected to grow in the mid- to high-single digits.

Based on the exchange rates at the end of 2010, Life Technologies expects no impact from currency on revenue during the first half. However, gross margin in each of the first two quarters is likely to be impacted by (160 basis points) currency. Consequently, EPS will be negatively impacted by 8 cents in the first quarter and 5 cents in the second quarter. In the second half of the year, currency is expected to have no material impact on revenues, gross margins or EPS.

Earlier this month, Life Technologies introduced Ion OneTouch system, an automated sample preparation system for the Ion Personal Genome Machine (PGM) sequencer. The company will begin shipment of the product in late June.

In December 2010, the company launched its Ion PGM sequencer, the first product to use semiconductor sequencing technology. PGM sales are off to a good start and the company expects significant contribution from Ion Torrent in the second half of 2011. We expect an update from the company regarding the sales of PGM.

Magnitude of Estimate Revisions

The magnitude of revisions has been modest following fourth quarter results. Overall, estimates for the first quarter have dropped by 8 cents to the current level of 85 cents per share in the last 90 days. However, estimates for fiscal 2011, have gone up by 2 cents to the current level of $3.87 per share over the past 3 months.

Surprise

Life Technologies have exceeded estimates in the past four quarters, at a stretch, resulting in a four-quarter average of 7.39%. This indicates that on an average, the company has exceeded the Zacks Consensus Estimate by this magnitude over the last four quarters.

Our Recommendation

Life enjoys a strong position in the life sciences market and we believe robust performance from its core business along with new product launches will help drive revenues going forward. Meanwhile, lower expenses and cost cutting along with increased revenues should help drive the bottom line.

Additionally, the company is increasing its focus on emerging markets, which bode well for long-term growth. We are also impressed by Life’s acquisition of Ion Torrent, which is expected to contribute significantly to the top line going ahead. However, the company could face challenges such as increased competition from players like, Thermo Fisher Scientific (TMO), Illumina (ILMN) among others and unfavorable currency movement.

Research funding for life science research either had a crawling rise in the recent past or declined in some cases. In addition, some countries have frozen grants due to the economic stress. Although the global economic condition is improving gradually, any hiccup in the recovery process could act as a deterrent.

We are currently ‘Neutral’ on the stock, which also corresponds to the Zacks #3 Rank (hold) in the short term.

 
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