Rating Update: Stock Rating F-Lowest (9/23/19)-Luminex Corp (LMNX).

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BUSINESS

Luminex Corporation develops, manufactures, and sells proprietary biological testing technologies and products for the diagnostics, pharmaceutical, and research industries worldwide. Its products include Luminex 100/200 that integrates fluidics, optics, and digital signal processing; FLEXMAP 3D system for use as a general laboratory instrument; MAGPIX system, a multiplexing analyzer for qualitative and quantitative analysis of proteins and nucleic acids; ARIES system, a sample to answer real-time PCR platform; ARIES M1 system, a single-module version of the ARIES System; and VERIGENE system, an automated multiplex-capable system.
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INVESTMENT RATING

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LMNX’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to be a Value Eraser.

Luminex has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Luminex has a poor Power Rating of 15 and a very low Appreciation Score of 11, resulting in the Lowest Value Trend Rating.

Luminex’s stock is selling significantly above targeted value. The current stock price of $22.35 compares to targeted value 12 months forward of $10.
Luminex’s very low appreciation potential results in an appreciation score of 11 (89% of the universe has greater appreciation potential.)
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Luminex has a Power Rating of 15. (This poor Power Rating indicates that LMNX only has a better chance of achieving attractive investment performance over the near to intermediate term than 15% of companies in the universe.)
Factors contributing to this poor Power Rating include: recent price action has been unfavorable; is currently in an unfavorable positi; and the trend in LMNX’s earnings estimates has been unfavorable in recent months.

INVESTMENT PROFILE

Luminex’s financial strength is above average. Financial strength rating is 70.
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Relative to the S&P 500 Composite, Luminex Corp has slightly more Value than Growth characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that LMNX is normal risk. Relative weaknesses include: low historical profitability, low historical growth, and high earnings variability. Luminex’s valuation is moderate: moderate dividend yield, high P/E ratio, and low price/book ratio. LMNX has unusually low market capitalization.

CURRENT SIGNALS

Luminex’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Luminex’s current technical position is very weak. The stock price is in a 6.8 month down move. The stock has declined 22.3% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Luminex Corp (NASDAQ: LMNX). Modest negative changes in fundamentals have recently occurred. Negative developments: significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred. Positive development: the consensus estimate for December, 2020 increased significantly.
The stock is currently rated F.
Luminex Corp (NASDAQ: LMNX) stock closed at $22.35 on 9/23/19 after a modest decline of -0.6%. However, exceptionally low trading volume at 49% of normal accompanied the decline. The stock has declined -1.1% during the last week and has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Luminex experienced a very significant reduction in cash of -$50.67 million (-40%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$54.25 million. Non-operating uses consumed -$2.27 million (-4% of EBITDA). Cash taxes consumed -$9.80 million (-18% of EBITDA). Re-investment in the business amounted to -$104.03 million (-192% of EBITDA). On a net basis, debt investors pulled out -$0.06 million (-0% of EBITDA) while equity investors furnished +$11.24 million (+21% of EBITDA).
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Luminex’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Luminex Corp Peer Group. In most years, Luminex was in the third quartile. Currently, Luminex is below median at -4% of EBITDA (-$2.27 million).

Luminex’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Luminex Corp Peer Group. (Since 2014 Cash Taxes, %EBITDA has accelerated sharply.) In most years, Luminex was in the top quartile and third quartile. Currently, Luminex is below median at -18% of EBITDA (-$9.80 million).

Luminex’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Luminex Corp Peer Group. In most years, Luminex was in the lower quartile and second quartile. Currently, Luminex is lower quartile at -192% of EBITDA (-$104.03 million).

Luminex’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Luminex Corp Peer Group as well. In most years, Luminex was in the third quartile and second quartile. Currently, Luminex is substantially above median at -0% of EBITDA (-$0.06 million).

Luminex’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Luminex Corp Peer Group. In most years, Luminex was in the top quartile and second quartile. Currently, Luminex is upper quartile at +21% of EBITDA (+$11.24 million).

Luminex’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Luminex Corp Peer Group. In most years, Luminex was in the top quartile and lower quartile. Currently, Luminex is lower quartile at -93% of EBITDA (-$50.67 million).
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Luminex’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Luminex Corp Peer Group. In most years, Luminex was in the top quartile. Currently, Luminex is above median at +24%.

PROFITABILITY

Luminex’s return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
This very significant erosion was due to very strong negative trend in pretax operating return supported by very strong negative trend in non-operating factors.
The productivity of Luminex’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Luminex’s return on equity is lower quartile (-0.5%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is lower quartile (-0.9%) reflecting asset turnover that is at median (0.59X) and lower quartile pretax margin (-1.5%).
Tax “keep” rate (income tax management) is lower quartile (53.7%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is lower quartile (1.17X).

GROWTH RATES

There are no significant differences between Luminex’s longer term growth and growth in recent years.
Luminex’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 8.9% per year.

Total asset growth has been 8.0% per year.

Annual E.P.S. growth has been 9.9% per year.

Equity growth has been 8.0% per year.

Luminex’s consensus growth rate forecast (average of Wall Street analysts) is 15.0% — substantially above the average of the historical growth measures.
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Relative to the Luminex Corp Peer Group, Luminex’s historical growth measures are generally second quartile. Revenue growth (8.9%) has been upper quartile. Total asset growth (8.0%) has been above median. E.P.S. growth (9.9%) has been substantially above median. Equity growth (8.0%) has been above median.

Consistent with this pattern, consensus growth forecast (15.0%) is also slightly above median.
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PRICE HISTORY

Over the full time period, Luminex’s stock price performance has been variable and significantly below market. Between November, 2008 and September, 2019, Luminex’s stock price rose +2%; relative to the market, this was a -70% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -35.2% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of -35.2% is lower quartile relative to Luminex Corp Peer Group.

Current 5-year total return performance of 4.2% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of 4.2% relative to S&P 500 Composite, Luminex’s total return performance is substantially below median relative to Luminex Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, LMNX’s overall valuation is high. The highest factor, the ratio of enterprise value/assets, is slightly above median. Ratio of enterprise value/revenue is slightly below median. Price/equity ratio is near the lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.

Relative to Luminex Corp Peer Group, LMNX’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is at the upper quartile. Ratio of enterprise value/assets is at the upper quartile. Price/equity ratio is slightly above median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Luminex has a major value gap compared to the median valuation. For LMNX to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.03X to 1.77X. If LMNX’s ratio of enterprise value/revenue were to fall to 1.77X, its stock price would be lower by $-9 to $13.
For LMNX to fall to lower quartile valuation relative to the Luminex Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.03X to 1.14X. If LMNX’s ratio of enterprise value/revenue were to fall to 1.14X, its stock price would decline by $-13 from the current level of $22.

VALUE TARGETS

LMNX’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to be a Value Eraser.
Luminex’s current Price Target of $10 represents a -54% change from the current price of $22.35.
Luminex’s very low appreciation potential results in an appreciation score of 11 (89% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 11, the low Power Rating of 15 contributes to an Value Trend Rating of F.
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Luminex’s current Price Target is $10 (-2% from the 2018 Target of $10 and -54% from the 09/23/19 price of $22.35). This plateau in the Target is the result of a +12% increase in the equity base and a -13% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in growth has a very slight negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a large positive impact.
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PTR’s return on equity forecast is 2.3% — slightly below our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is well below the 2017 peak of 9%.

PTR’s growth forecast is 10.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 26%.

PTR’s cost of equity forecast is 5.7% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is below the 2010 peak of 7.8%.
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At Luminex’s current price of $22.35, investors are placing a positive value of $3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 9.0% per year, and a return on equity of 5.8% versus a cost of equity of 6.0%.
PTR’s 2020 Price Target of $10 is based on these forecasts and reflects an estimated value of existing assets of $-13 and a value of future investments of $23.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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