After A 40% Fall This Year Illumina Stock Is A Better Pick Over Its Peer

ILMN: Illumina logo

We believe that Illumina stock (NASDAQ: ILMN), a gene sequencing company, is currently a better pick than Thermo Fisher Scientific stock (NYSE: TMO), given Illumina’s better prospects. Both companies are trading at a similar valuation of around 5x trailing revenues. If we look at stock returns, Thermo Fisher Scientific, despite a fall of 18% year-to-date, has outperformed Illumina, down 43%, as well as the broader markets, with the S&P500 index falling 21%. For Illumina, legal troubles around the acquisition of Grail – a cancer blood test developer – have weighed on its stock this year. Illumina’s deal for Grail is under an antitrust review in the U.S. and Europe. There is more to the comparison, and in the sections below, we discuss why we believe ILMN stock will offer better returns than TMO stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Illumina vs. Thermo Fisher Scientific GroupWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Thermo Fisher Scientific’s Revenue Growth Has Been Better In Recent Years

  • Illumina’s revenue growth of 49.2% over the last twelve months is much better than 11.9% for Thermo Fisher Scientific.
  • However, if we look at a longer time frame, Illumina’s sales grew at an average growth rate of 12.5% to $4.5 billion in 2021, compared to $3.3 billion in 2018, while Thermo Fisher Scientific saw its revenue grow at an average rate of 17.6% to $39.2 billion in 2021, compared to $24.4 billion in 2018.
  • Illumina’s sales have been rising due to the booming demand for gene sequencing. The company’s cancer screening and population genomics testing are driving its revenue growth. Also, gains from Covid-19 surveillance programs have contributed to the top-line expansion.
  • Illumina has a recurring revenue model from consumables and accessories, accounting for 83% of the company’s total sales in 2021.
  • Thermo Fisher Scientific manufactures analytical laboratory instruments used in various tests, and the pandemic has increased demand for these instruments. Its sales growth is buoyed by continued market share gains for its instruments.
  • Thermo Fisher Scientific has seen a solid 18.8% growth in the first half of 2022, primarily driven by its Laboratory Products & Biopharma Services segment, which saw a substantial 53% y-o-y growth. This can be attributed to its December 2021 acquisition of PPD Inc. – a clinical research services provider to the biopharma and biotech industry – for $17.4 billion. The PPD business contributed $3.4 billion in revenue in the first half of 2022.
  • Our Illumina Revenue and Thermo Fisher Scientific Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Illumina’s revenue is expected to grow slightly faster than Thermo Fisher Scientific’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 11.6% for Illumina, compared to a 10.3% CAGR for Thermo Fisher Scientific, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

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Thermo Fisher Scientific Is More Profitable But Comes With Higher Risk

  • Thermo Fisher Scientific’s current operating margin of 23.8% is far better than -0.2% for Illumina.
  • However, Illumina has enjoyed better margins over recent years. The current margins compare with 20.6% and 29.3% figures seen in 2019, before the pandemic, respectively.
  • Thermo Fisher Scientific’s free cash flow margin of 20.6% is better than 7.6% for Illumina.
  • Our Illumina Operating Income and Thermo Fisher Scientific Operating Income dashboards have more details.
  • Looking at financial risk, Illumina is better placed than Thermo Fisher Scientific. Its 2% debt as a percentage of equity is lower than 14% for Thermo Fisher Scientific, while its 50% cash as a percentage of assets is higher than just 2% for the latter, implying that Illumina, with its better debt position and more cash cushion, offers lower financial risk compared to Thermo Fisher Scientific.

3. The Net of It All

  • We see that Illumina comes with lower financial risk. On the other hand, Thermo Fisher Scientific has seen better revenue growth over recent years and is more profitable.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Illumina is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Illumina and Thermo Fisher Scientific over the next three years and points to an expected return of 30% for Illumina over this period vs. a 22% expected return for Thermo Fisher Scientific, implying that both are good investment opportunities currently. However, if investors have to choose one among the two, they will likely be better off buying ILMN over TMO, based on Trefis Machine Learning analysis – Illumina vs. Thermo Fisher Scientific – which also provides more details on how we arrive at these numbers.

While ILMN stock may outperform TMO, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Abbott vs. Amerco.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Oct 2022
MTD [1]
YTD [1]
Total [2]
ILMN Return 15% -43% 71%
TMO Return 8% -18% 287%
S&P 500 Return 6% -21% 69%
Trefis Multi-Strategy Portfolio 7% -21% 212%

[1] Month-to-date and year-to-date as of 10/6/2022
[2] Cumulative total returns since the end of 2016

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