Luminex - Expect Strong Growth in 2009

Luminex Corp. (LMNX - Analyst Report) posted revenue of $104.5 million in 2008, marking growth of 39% from 2007. Technology segment sales increased 34% to $83.6 million, while Assay segment sales grew 66% to $20.9 million. Through the first quarter 2009, Technology segment sales grew 13% to $21.1 million and Assay segment sales increased 2% to $4.5 million. Total revenue grew 11% in the first quarter to $25.6 million. Technology segment sales continue to be driven by growth in consumables and royalties.

EPS came in at $0.08 in 2008 and $0.04 (adjusted for litigation expense) in the first quarter 2009, compared to ($0.47) and ($0.03) in the year-earlier periods, respectively. Gross margins increased by 240 basis points in the most recent quarter as the company's product mix shifted towards higher margin consumables and royalties.

At the first quarter earnings release, management reduced 2009 revenue guidance to between $125 million and $135 million from the previous guidance of $130 million to $140 million. We model 2009 revenue of $129.6 million, including $104.7 million in Technology segment sales and $24.9 million from the Assay segment. Revenue growth will be supported by an average of 175 – 225 system placements per quarter and the expected launch of several new assays during the year.

We also expect to see some incremental revenue come from the currently-marketed RVP panel as a result of significant interest from public health authorities in response to the swine flu (H1N1) outbreak. Increased spending from NIH funded research could also directly benefit Luminex over the next 2 years. We expect margins to continue to expand in 2009 as a result of the product mix continuing to shift towards higher margin products. Cost-control efforts and R&D leverage should dually benefit operating margins in 2009 and beyond, and help EPS grow significantly faster than revenues. We look for EPS of $0.35 in 2009.

Longer-term revenue growth will be driven by increased consumables utilization and a larger assay menu running on a greater installed systems base. The company will enter the Chinese market in 2009, which should provide an additional base to grow revenue for the long-term. Margins should continue to improve.

We look for gross margins to peak at about 71% around 2012 and expect Luminex to continue to benefit from operating expense leverage. The tax rate will likely increase significantly around 2011 as the company exhausts net-operating loss carry-forwards. Nevertheless, we expect EPS growth to outpace revenue for the foreseeable future. We model EPS to grow at a 4-year CAGR of 84% on sales growth of 19% from 2008 – 2012.

We also believe Luminex will be looking to put the company's significant cash balance to work in the form of acquisitions in 2009. We expect the company to generate positive operating cash flow for the foreseeable future so the vast majority of the company's $109 million of cash could be used for a strategic acquisition.

Near-term risks include the potential for a significant reduction in research and diagnostics spending due to the weak economy, the possibility that pipeline products fail to gain regulatory clearance and the potential that the instrument base grows slower than anticipated. Integration risk could materialize if the company makes a large acquisition. Additional risks include a significant proportion of revenues derived from only 2 customers and the potential that the company's partners switch to competing technologies.

Luminex shares currently trade at $18.07. We recommend that investors hold at the current price given the trade-off between significant potential for EPS growth in 2009 offset by the risk of a considerable decrease in research and diagnostic spending. We would like to see more visibility on how the economic weakness may affect financial performance before recommending the name. Our price target is $20.00, representing 34x our 2012 EPS estimate of $0.90, discounted at an annual rate of 15%.