AFFX Affymetrix, Inc.

We reiterate our Neutral recommendation on Life Technologies Corporation (LIFE) with a target price of $46.00.

Life Technologies reported a strong first quarter 2012 with both revenues and adjusted earnings per share (EPS) sailing past the Zacks Consensus Estimates.  The company has modified its reporting structure and now books revenues under Research Consumables, Genetic Analysis and Applied Sciences divisions.  

To counter the various headwinds witnessed in its end markets and bolster the bottom line, Life Technologies is stepping up a number of cost-saving initiatives. Accordingly, the company reported a 200 basis point (bps) improvement in adjusted operating margin to 30.2% in the reported quarter.

The company is realizing savings in terms of efficient administration, aligning R&D programs and manufacturing efficiencies. The company is targeting operating margin of 31% for 2013, up from 29% in 2011, which will be achieved through fixed cost leverage, supply chain efficiencies and manufacturing productivity.

As a result of Life Technologies’ increasing focus on the emerging markets, this region now accounts for approximately 10% of total sales. While the company had derived revenues worth $188 million in 2007 from this region, the figure is expected to shoot up to $1.6 billion in 2015, representing a CAGR of 30%.

In the last quarter, the company recorded robust growth across several emerging markets – Greater China (high-teens growth), Latin America (double-digit) along with Eastern Europe and Russia -- where sales network expansion is ongoing. The company is leaving no stone unturned to harness the immense potential of this region. The strategies include investment in infrastructure, increasing sales force and maximizing its eCommerce capability.

The Ion Torrent franchise at Life Technologies is also a potential growth driver. This franchise was inducted into the company’s portfolio with the acquisition of Ion Torrent, a DNA sequencing company, in October 2010. For the past few quarters, the company has been recording robust growth from its Ion personal genome machine (“PGM”). Launched in December 2010, the total number of PGM placements rose to 700 in 2011.

However, the company continues to experience lower demand from academic and government-funded researchers in the US and Europe, which might worsen with deteriorating economic conditions. Moreover, the competitive landscape is tough with the presence of Illumina (ILMN) and Affymetrix (AFFX), among others.

Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.

 
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