Here’s Why We Believe Boston Scientific Is A Better Pick Over Illumina Stock

We think that Boston Scientific (NYSE:BSX) currently is a better pick compared to Illumina (NASDAQ:ILMN). BSX stock trades at about 5.6x trailing revenues, compared to around 18.8x for ILMN. Does this gap in Illumina’s valuation make sense? Actually, to some extent it does, comparing the past performance of these two companies. However, we believe that this gap will narrow going forward in favor of Boston Scientific. While business for both the companies have been hit during the pandemic, due to deferment of elective surgeries, it is expected to see a sharp rebound in 2021, with containment of the Covid-19 virus.

Illumina’s sequencing systems have a base of over 15,000 units currently and it has seen strong growth over the recent years, given the limited competition. Looking at Boston Scientific, the sales growth over the recent years (barring 2020, which was impacted by the pandemic) has largely been driven by higher demand for its neuromodulation and peripheral intervention, which includes stents, balloon catheters, and peripheral embolization devices, among other products. The demand for these products is largely linked to the total volume of procedures performed, which was adversely impacted in 2020. Boston Scientific has come up with several new products, including Watchman FLX, Exalt, Polarx, and WaveWriter Alpha, among others, and it has been gaining market share from the likes of Medtronic. This trend is expected to continue, boding well for BSX stock over the coming years. However, there is more to the comparison between Illumina and Boston Scientific. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Boston Scientific vs. Illumina: BSX stock looks undervalued compared to ILMN stock has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Between 2017 and 2020, Boston Scientific’s revenues grew by about 10% from $9.0 billion in 2017 to $9.9 billion in 2020. Note that 2020 revenues declined 7% y-o-y due to the impact of the pandemic on the company’s business. Looking at Illumina, total revenue grew 14% from $2.8 billion in 2017 to $3.2 billion in 2020, which also reflected a high single-digit y-o-y decline.

2. Operating Income

Boston Scientific’s operating income declined from $1.4 billion in 2017 to $-0.5 billion in 2020, due to a sharp decline in operating margins from 15% in 2017 to -5% in 2020, due to increased operating costs during the pandemic and increased R&D investments. Looking at Illumina, the operating income declined from $606 million in 2017 to $580 million in 2020, due to a contraction in margins from 23% to 18% over the same period. Now, Illumina’s operating margin has been better than Boston Scientific over the last twelve month period as well as over the recent years. Also, Illumina’s margins have been on an upward trajectory till before the pandemic.

The Net of It All

Illumina is a leader in the sequencing systems and it is likely to continue to see expansion of its base. Illumina’s revenue growth, operating income growth, and operating margins, all compare favorably with Boston Scientific over the recent years, and this has been rewarded by the investors in the form of a high multiple that ILMN stock trades at. However, as we look forward, Boston Scientific will likely continue to expand its offerings and gain market share over the coming years, though the company faces stiff competition from Medtronic and Abbott. Illumina will see increased competition in the sequencing market, with companies such as Pacific Biosciences of California also expanding their installed base, and comparatively smaller companies, including Rosewell Biotechnologies making inroads to offer less expensive sequencing options. Also, Oxford Nanopore Technologies has been gaining attention for its different approach to sequencing. We believe that an increased competition will weigh on the multiple that ILMN stock currently enjoys. As such, we believe that the valuation gap between Boston Scientific and Illumina will narrow going forward and BSX stock will offer better returns for long-term investors.

While BSX stock looks like it can gain more, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Becton Dickinson vs. Abbott.

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