We think that Illumina stock (NASDAQ: ILMN) currently is a better pick compared to the Walgreens stock (NYSE: WBA), despite it being the more expensive of the two, trading at 7.8x trailing revenues compared to 0.3x for Walgreens. The gap in the valuation of these two companies can be attributed to Illumina’s superior revenue growth and better financial position, as discussed below. We compare these two companies due to their similar market capitalization.
If we look at stock returns, Walgreens’ -25% change is comparatively better than the -38% return for Illumina over the last twelve months. This compares with a -5% change in the broader S&P 500 index. Walgreens saw higher sales during the pandemic, and the decline in its stock price can be attributed to slowing Covid-19 related demand. For Illumina, legal troubles around the acquisition of Grail – a cancer blood test developer – have weighed on its stock. Illumina’s deal for Grail is under an antitrust review in the U.S. and Europe.
While both the companies are likely to see continued top-line expansion, Illumina is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that ILMN stock will offer better returns than WBA 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 Walgreens vs. Illumina: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
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1. Illumina’s Revenue Growth Has Been Stronger
- Illumina’s revenue growth of 34% over the last twelve months is much better than the 9% for Walgreens.
- Looking 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 Walgreens saw its revenue grow at an average rate of 4.4% to $112 billion in 2021, compared to $98.4 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.
- Walgreens’ revenue growth over the recent years was driven by increased demand for Covid-19 testing as well as vaccine administration. Now that the economies have opened up, the company will see a lower contribution from the Covid-19 testing and vaccine administration. However, it also means a rise in footfall at its stores and continued expansion of its online healthcare platform (Find Care).
- Our Walgreens Revenue and Illumina Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Illumina’s revenue is expected to grow faster than Walgreens’ 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 10.9% for Illumina, compared to a 1.6% CAGR for Walgreens, 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.
- Walgreens’ current operating margin of 3.4% is better than -1.9% for Illumina.
- This compares with 4.6% and 27.8% figures seen in 2019, before the pandemic, respectively.
- Illumina’s free cash flow margin of 9.3% is better than 3.8% for Walgreens.
- Our Walgreens Operating Income and Illumina Operating Income dashboards have more details.
- Looking at financial risk, Illumina is better placed than Walgreens. Its 5% debt as a percentage of equity is much lower than 75% for Walgreens, while its 9% cash as a percentage of assets is higher than 2% for Walgreens, implying that Illumina, with its better debt position and higher cash cushion, offers lower financial risk compared to Walgreens.
3. The Net of It All
- We see that Illumina has demonstrated better revenue growth and it comes with lower financial risk. On the other hand, Walgreens is more profitable and trades at a comparatively lower valuation.
- 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, despite its higher valuation.
- The table below summarizes our revenue and return expectations for Illumina and Walgreens over the next three years and points to an expected return of 47% for Illumina over this period vs. a 26% expected return for Walgreens, implying that both are good investment opportunities currently. However, if investors have to choose one among the two, they are likely to be better off buying ILMN over WBA, based on Trefis Machine Learning analysis – Walgreens vs. Illumina – which also provides more details on how we arrive at these numbers.
While ILMN stock may outperform WBA, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Target vs. Williams-Sonoma.
|S&P 500 Return||-5%||-18%||75%|
|Trefis Multi-Strategy Portfolio||-7%||-23%||208%|
 Month-to-date and year-to-date as of 5/19/2022
 Cumulative total returns since the end of 2016
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