Why Pacific Biosciences’ crash landing epitomizes the classic overreaction; now what

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The News:

Pacific Biosciences of California Inc. (Nasdaq:PACB) skidded $1.11, or 22% last week, to $3.94 in response to a wider-than-expected first-quarter loss. Wall Street was expecting the Menlo Park, CA-based company to report a net loss inline with the first quarter of last year, or $0.23 per share.

@PacBio stock skids on report of $0.26 per share loss, exceeding #WallStreet expectations Click To Tweet

Instead, the company reported a loss of $0.26 per share, resulting in an immediate battering. As a result, the Zacks Consensus estimate for the full year was pegged at a loss of $0.86 per share. Although product and service revenue rose 60%, costs associated with generating that revenue jumped 66%.

Management was quick to suggest its first-quarter gross margin was roughly equal to the previous-year period. That wasn’t particularly reassuring for shareholders hoping to see margins widen as the company sells more of its DNA sequencing machines.

Steve’s Take:

Although Pacific Biosciences’ first quarter wasn’t necessarily bad, it does come on the heels of the launch of a cost-barrier-breaking product from Illumina Inc. PacBio’s main rival recently launched a machine expected to lower the cost of sequencing an entire human genome down to just $100 in the years ahead.

While fundamental differences between Illumina’s and PacBio’s machines make the latter’s better-suited to academic research, an ultra-low price point has made Illumina the go-to sequencer for drugmakers. Going even lower could help the product become popular among healthcare providers as well, which makes Illumina the best gene-sequencing stock you can buy right now.

While PacBio might be able to carve out a nice niche within the halls of academia, today’s results suggest the company’s profitability corner might be even further ahead than hoped.

Yet news stories about PacBio trended somewhat positive last week, according to Alpha One Sentiment. The research group, a division of Accern, ranks the sentiment of news coverage by reviewing more than 20 million news and blog sources. Alpha One ranks coverage of public companies on a scale of -1 to 1, with scores closest to one being the most favorable.

PacBio earned a media sentiment score of 0.05 on Alpha One’s scale. Alpha One also assigned news coverage about the company an impact score of 80 out of 100, meaning that recent news coverage is likely to have an effect on the company’s share price in the near term.

The good news was PacBio’s top-line improvement. Revenue increased significantly compared to the prior year period thanks to a big jump in product revenue from $12.4 million to $21.3 million.

The higher revenues weren’t enough to make the company’s bottom line look better, though. Its net loss worsened from the prior year period. The primary culprit was significantly higher product costs.

PacBio ended the first quarter with cash, cash equivalents and investments, excluding restricted cash, totaling $56.1 million. That’s down from the $72 million it reported at the end of 2016.

CEO Michael Hunkapiller said, “We are pleased with our first quarter results and our continued progress in driving growth in our business.” He added, “Instrument revenue has grown steadily this past year as we have increased shipments of Sequel systems.”

Hunkapiller noted that PacBio has seen significant strength in its China business: More than 20% of the company’s sales over the past two quarters came from China.

Illumina’s launch of its NovaSeq system could cause PacBio more headaches. The new system appears to have had a solid debut in the first quarter. Success for NovaSeq puts pressure on PacBio’s development efforts. The company is working on a new version of its Sequel sequencing system, but that product isn’t scheduled to be released until late 2018.

Bottom Line:

Investors may be watching technical indicators such as the Williams %Range, or Williams %R as it’s known. The Williams %R is a momentum indicator that helps measure oversold and overbought levels. This indicator compares the closing price of a stock in relation to the highs and lows over a certain time period.

A common look-back period is 14 days. PACB’s Williams %R presently stands at -87.07. The Williams %R oscillates in a range from 0 to -100. A reading between 0 and -20 would indicate an overbought situation. A reading from -80 to -100 would indicate an oversold situation.

Lastly, let’s check out what the analysts have to say:

As of Friday, April 28, 2017, the consensus forecast among 7 polled investment analysts covering Pacific Biosciences advises that the company will Outperform the market, says the Financial Times. This has been the consensus forecast since the sentiment of investment analysts improved on May 01, 2015. The previous consensus forecast advised investors to Hold their position.

Recommendations 1yr ago Latest
Buy 2 2
Outperform 2 3
Hold 2 2
Underperform 0 0
Sell 0 0

1-YEAR PRICE CHANGE: -58.81%

The stock’s market capitalization is $368.55 million. PACB has a 12-month low of $3.75 and a 12-month high of $10.57. The firm’s 50 day moving average is $4.87 and its 200-day moving average is $5.80.

The 6 analysts offering 12-month price targets for Pacific Biosciences have a median target of $7, with a high estimate of $8 and a low estimate of $5.10. The median estimate represents a 77.66% increase from the last price of $3.94 on April 28. (Shares closed Monday May 1, 2017 up 2% at $4.01.)

The overreaction to its earnings news leaves PACB’s shares smack in the middle of Oversold territory. Of course, Oversold doesn’t always mean Buy.

Steve's Take: despite slump, @PacBio still gets a buy recommendation Click To Tweet

But with analysts saying (as of April 28, 2017) that shares have a consensus price target 78% higher than its last trading price and what I believe was clearly an overreaction in the market last week to quarterly earnings, this name gets my Buy recommendation. It’s risky, to be sure, but a rational gamble.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.