Is Illumina Stock A Better Pick Over TMO?

ILMN: Illumina logo
ILMN
Illumina

We believe Illumina stock (NASDAQ: ILMN) and its industry peer Thermo Fisher Scientific stock (NYSE: TMO) are good buying opportunities and will likely offer similar returns in the next three years.  ILMN trades at a higher valuation of 7.3x trailing revenues, compared to 4.6x for TMO, partly due to its financial position. However, Thermo Fisher Scientific has seen better revenue growth in recent years and is more profitable, as discussed below.

Looking at stock returns, ILMN has fared slightly better with 1% returns this year vs. -5% returns for TMO. However, both have underperformed the broader S&P500 index, up 8%. There is more to the comparison, and in the sections below, we discuss why we believe that both ILMN and TMO stock will offer good returns in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Illumina vs. Thermo Fisher ScientificWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Thermo Fisher Scientific’s Revenue Growth Is Better 

  • Thermo Fisher Scientific’s revenue growth has been much better, with a 20.8% average annual growth rate in the last three years, compared to 10.8% for Illumina.
  • 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 services, accounting for 84% of the company’s total sales in 2022.
  • 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 good 15% growth in 2022, primarily driven by its Laboratory Products & Biopharma Services segment, which saw a substantial 51% 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 $7.1 billion to the company’s top line in 2022.
  • Our Illumina Revenue Comparison and Thermo Fisher Scientific Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Thermo Fisher Scientific’s revenue is expected to grow marginally faster than Illumina’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 9.4% for Illumina, compared to a 10.6% CAGR for Thermo Fisher Scientific, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and those 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 predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed 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

  • Illumina’s operating margin has slid from 29.3% in 2019 to -90.6% in 2022, while Thermo Fisher Scientific’s operating margin declined marginally from 20.6% to 20.3% over this period.
  • Looking at the last twelve-month period, Thermo Fisher Scientific’s operating margin of 18.3% fares much better than -99.3% for Illumina.
  • This sharp decline for Illumina can be attributed to an impairment charge of $3.9 billion on goodwill and a legal contingency of $458 million in potential fines from the European Commission related to the Grail acquisition.
  • Note that Illumina acquired Grail in 2021 despite regulatory concerns, and it is likely to face a fine of 10% of its global annual turnover as a penalty for closing the deal without EU antitrust approval. [1]
  • Our Illumina Operating Income Comparison and Thermo Fisher Scientific Operating Income Comparison dashboards have more details.
  • Thermo Fisher Scientific’s free cash flow margin of 17.5% is higher than 5.2% for Illumina.
  • Looking at financial risk, Illumina fares better with its 6.9% debt as a percentage of equity lower than 17.4% for Thermo Fisher Scientific and its 12.9% cash as a percentage of assets higher than 3.7% for the latter, implying that Illumina has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Thermo Fisher Scientific has demonstrated better revenue growth, is more profitable, and is available at a comparatively lower valuation multiple. On the other hand, Illumina has a better debt position and cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Thermo Fisher Scientific is the better choice of the two, given its lower valuation and better prospects. That said, even Illumina stock is expected to give similar returns.
  • If we compare the current valuation multiples to the historical averages, Illumina fares better, with its stock currently trading at 7.1x trailing revenues vs. the last five-year average of 15.0x. In contrast, Thermo Fisher Scientific stock trades at 4.6x trailing revenues vs. the last five-year average of 5.9x.
  • Our Illumina (ILMN) Valuation Ratios Comparison and Thermo Fisher Scientific (TMO) Valuation Ratios Comparison have more details.
  • 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 31% for ILMN over this period vs. a 36% expected return for 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 and TMO may offer good returns in the next three years, 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 high-performance portfolio with a low downside instead? Here’s a reinforced value portfolio that has beaten the market consistently while limiting losses during periods of sharp market declines.

Notes:
  1. Exclusive: Illumina to face EU fine of 10% of turnover over Grail deal -sources, Foo Yun Chee, Reuters, Jan 12, 2023 []