Why Being Added into the S&P 500 Matters So Much for Illumina

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Being added to the S&P 500 Index comes with a certain amount of prestige. It can also come with a big financial boost in some cases. When it comes to what that means for Illumina Inc. (NASDAQ: ILMN), both cases seem to be true.

Illumina shares were up handily on Friday after a report from Thursday night announced that its shares will replace Sigma-Aldrich Corp. (NASDAQ: SIAL) in the S&P 500. The move does not take place until after the closing bell on Wednesday, November 18. As far as why the change is taking place, Merck KGaA is acquiring Sigma-Aldrich in a deal expected to be completed on or about that date pending final conditions.

24/7 Wall St. looked for some research around this index add for Illumina, and two post-warning analyst downgrades came to mind. Then a report on Friday from Merrill Lynch estimated that some 14.5 million net shares would need to be acquired by index-trackers and from ETFs and funds that replicate the S&P 500. The firm said that they expect Illumina shares to rise from the index change. After all, it is over 8 days worth of trading volume.

The report from Merrill Lynch has a $200 price target and is based upon 44 times 2017 earnings and 12 times 2016 revenue. Friday’s research report went on to say:

We believe this sell-off was execution based, and is not indicative of a fundamental change in the company’s competitive landscape or product demand. As we noted following our meetings with management last week, we continue to view Illumina as the premier firm in DNA sequencing, with limited risk of losing either its technology or market dominance, however market development is likely to require both time and investment.

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What matters here in the big picture outside of the raw inflows from S&P 500 Index buyers is that Illumina is perhaps one of the greatest companies in the entire BioHealth space. It has been trading with what would look like high premium valuations at almost 50 times current year earnings. That being said, and before the pop on Friday, Illumina shares had sold off nearly $100 from its 52-week high.

The gene sequencing and testing leader is an integral part of that $1,000 genome race. This is a key step towards personalized medicine. In fact, its 4,300 or so employees and its revenue base of over $2 billion at this time both have room for substantial growth in the years ahead. We just have to keep in mind that a $24 billion market cap, even after the major sell-off that has been seen, is far from cheap. This summer’s valuation drop was after a gearing down of growth targets.

Illumina shares were up 7% at $166.75 shortly before Friday’s closing bell. Its total share volume was just over 4 million shares with just under an hour until those close, barely twice the 1.9 million or so for an average day’s volume. Illumina’s 52-week range is $130.00 to $242.37 and its consensus analyst price target is closer to $185.

The med-tech industries around biotech and pharma have been under pressure. That may not end for some time, but that may not be a crucial driver for Illumina now that its shares had already fallen so much ahead of this S&P 500 Index add. Stay tuned.

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