On Wednesday, TD Cowen raised its rating on Illumina (NASDAQ:ILMN) stock from Hold to Buy, increasing the price target to $144 from $126. The upgrade comes after a reassessment of the company's future following the recent GRAIL spinoff. The firm believes that Illumina now presents a more straightforward and appealing investment proposition.
Illumina has recently completed the spinoff of GRAIL, a move that has simplified the company's business narrative and removed a significant distraction for investors. This strategic shift is expected to leave Illumina better positioned to focus on its core operations and growth prospects.
TD Cowen highlighted the end of the GRAIL distraction as a positive development, as it had previously deterred investor interest due to concerns about dilution and strategic disadvantages.
The firm also noted that Illumina is entering a favorable phase in its product cycle with the maturation of the X cycle. This development is anticipated to ease price pressures and lead to improved revenue growth.
Additionally, the new management team at Illumina, which is characterized by a strong operational focus, has been identified as a key driver for potential cost reductions. Insights into the magnitude and timing of these cost-cutting opportunities were provided during Tuesday's Strategy Update.
Illumina's stock performance has been lackluster, trailing behind its peers in the large cap tools sector by 15% year-to-date and 38% in 2023. However, TD Cowen suggests that with the new management team, revised guidance, refined Street models, accelerated cost-cutting measures, and continued innovation, the current moment may present a favorable opportunity for investors to reevaluate the company's long-term potential.
TD Cowen projects that Illumina's earnings per share (EPS) compound annual growth rate (CAGR) will outpace that of other large-cap companies. Coupled with the anticipated revenue growth, the firm sees an improved risk/reward scenario for Illumina.
The new $144 price target implies a 20% upside potential for the stock, applying a forward price-to-earnings (P/E) ratio of 28 times the next twelve months' (NTM) EPS, up from the previous 25 times.
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