Fundamental Analysis of Illumina - ILMN

I don’t usually look at pharmaceutical or health-care related securities, much less now during COVID-19. But the CFO selling $461,380 worth of their stocks, and the fact the insider trading has been exclusively selling for the past two years, and the annual shareholder meeting six days away, this piqued my interest.

What Does Illumina Do?

They see themselves as a global leader in genomics, their business is offering the machines, equipment, and technology required in genome mapping and analysing.

A look at a selection of clients helps to explain the depth and range of what they offer.


Source: Illumina Source Book

Their business is broken into two revenue-generating halves (plus an investment side which is more R&D strictly speaking.)

illumina revenue
Source: Illumina Source Book

Sequencing relates to their larger machines, technology, and the consumable products linked to them. These are the machines used when performing detailed analysis and research. For instance, the first sequencing of COVID-19 was done on an Illumina machine. They currently offer a range of machines from just under $1m to $20k. Approved for use by different regulators (from food testing to patient testing) and with a range of prices, this is the main revenue driver for the business.

Microarrays are for more broad testing. Think of testing kits, cheaper to produce, singular focus, and mass-produced. While a smaller part of the revenue comes from this section, it’s more reliable revenue, you aren’t having to sell and install large machines to a more select range of skilled customers. An example where this is being used is non-invasive prenatal testing (NIPT), a blood test to check for any known genetic challenges for pregnant women. In the US, 97% of high-risk pregnancies and 56% of average-risk pregnancies will reimburse NIPT. In the EU, the Netherlands and Belgium cover NIPT for all pregnancies. Currently due to COVID-19, in Aetna, all pregnancies are receiving free NIPT.

illumina earnings
Source: Illumina Q1 2020 Summary

Illumina does their manufacturing (though some of the microarrays are outsourced) and also offers laboratory services, these items show up in the services and other section of their income reports, but they make up a smaller chunk of profits compared to the main sequencing machine production and sales.

illumina investments
Source: Illumina Source Book

Innovation is critical in IP heavy industries. This means Illumina has to invest into a range of startups and related companies, to keep its competitive edge and also to take advantage of any new advancements made in their field. As such Illumina does have a flow of credit it uses to help fund its investments and keep cash flow predictable. It’s very common for pharmaceutical companies to have a large portfolio of investments.

How Has COVID-19 Changed The Business?

While it was an Illumina machine in China which was used to first sequence COVID-19, and their machines are used by clients to test their patients, the outbreak has created a slowdown.

Like many companies, they have also withdrawn their fiscal 2020 full-year revenue and earnings per share guidance due to the pandemic. Which a poor previous report this has also shaken investor confidence.

We did get some insight some the prepared statements announced on the 30th of April.

The prediction by Illumina is the second quarter impact will be substantially greater than the impact we experienced in the first quarter. The expectation is for revenue to decline sequentially in every region in the second quarter, with the smallest dollar decline expected in China, and the largest in AMR.

illumina geo
Source: Illumina Q1 2020 Summary

The issue Illumina face is their sequencing machines are great for vaccine research and understanding COVID-19, but labs are not buying the machines in the immediate face of the pandemic, as there are more pressing issues to resolve.

As such we can expect a slowdown of the biggest revenue driver for the business. The products have made a recovery as labs reopen and people refocus on COVID-19, which Illumina has shifted their focus as well to maximise their usefulness to clients.

The business has been impacted negatively overall by over $20 million in the first quarter, which did get slightly offset by a small contribution from COVID‐19 related stocking, and sequencing consumables and services.

They have also pledged $10m in different forms of aid related to COVID-19, with an annual of $3.5bn and an annual income of $942m I wouldn’t worry about them being overly charitable and eating into profits.

We also see they have drawn down on some debt, like many companies they have reacted by protecting their cash flow and drawing any debt they can before encountering any financing issues (or higher rates if they waited.)

How Are Illumina’s Fundamentals?

Screenshot_20200521-152702
Source: Genuine Impact

Illumina is a very high-quality investment. With a profit margin of 28.3%, this is a very attractive investment. 16.7% return on invested capital through a mix of share buybacks and some new issues, and a very comfortable cash position, the only downside is the lack of a dividend.

illumina cash
Source: Wallmine

In terms of consistency, they also perform very well. They have demonstrated they have a very defensible business.

illumina 6 month
Source: Yahoo Finance

In terms of share price and value, they have struggled during the year but overall they have returned to form after a rocky start.

Currently, they are overvalued by most metrics. P/E of 54.84, Price/Sales of 14.79, and even a Price/Book of 11.40. If you are a fan of Buffett’s teachings you would put this on a watch list and not touch it right now.

I mentioned the insider trading activity.

illumina insider
Source: MarketBeat

We have seen a lot of selling activity by executives but this hasn’t spooked investors.

Illumina has a strong rating when it comes to sell-side analysts.

Screenshot_20200521-152717
Source: Genuine Impact

While a slightly mixed back of growing hold positions and a few sell ratings, sell-side see a bright future even at this overpriced valuation.

Digging into this a little more you might be surprised to find that the target price is negative.

The issue is, many of the price estimates have already been hit. At the start of the month, four of five analysts increased their target price, and one decreased it (still higher than the current price) however the recovery has been much quicker than expected.

In Summary - Is It A Buy or Hold?

The price has recovered far faster than the analysts expected, which is great to see for existing investors but creates a problem for anyone looking to buy this stock right now.

It’s an expensive pick but this is a defensible strong company. If you are looking for a solid 5-10 year pick and a company which will benefit from reinvestment into pandemic prevention after COVID-19 this is an interesting pick where they have a strong portfolio and balance sheet, to begin with.

If you are looking for a shorter-term, one-year turnaround I would avoid this company. We know they will have a troubled Q2 and they are not benefiting from COVID-19. They aren’t working on a vaccine and do not influence that side of the fence. Anyone who is researching a vaccine has the machines they need or will use leverage other labs with the skills and equipment required. There is a chance they will find a new short term solution which benefits from the current pandemic but that is a bigger gamble than trying to predict who will mass-produce a vaccine first.

This is an excellent high-quality purchase as a long term investment, it’s overpriced so anyone looking to derisk or seeking shorter-term gains are better off waiting or looking elsewhere. If you are looking for quality purchase then this should be interesting for you.

Thanks for taking the time to read this, and let me know what you think!

Will you be buying in at a high valuation, or waiting for another dip? I wonder how the annual meeting will go in six days, that might shake the price up a bit more.

8 Likes

Thanks so much for this, it’s tremendous. I’ve been following Illumina for a while now. I think I feel about it pretty much the same as you concluded. It’s top of my list for if the market plunges again, but it’s really hard to get over the line with it at the current valuations. Over the last few days, in particular, it’s been very high.

I’m finding it a little bit of a pity that fractionals aren’t available on this one, since my portfolio isn’t bit and I’d quite like to ease into it with some gradual additions.

Thanks again for your excellent work on this.

EDIT: By the way, I don’t suppose you’re taking requests for these, by any chance?

5 Likes

Thanks a lot for the insight, I was following this one for a while even before the whole pandemic situation.

Anyone who has encountered info about this field or for example read Jamie Metzl’s book “Hacking Darwin”, know that this industry will make unthinkable a reality very soon. There will be some huge winners beyond our imagination.

p.s. If someone wants to dive deeper, they can check top holdings in this one:

1 Like

Thanks for the feedback! Glad you have enjoyed the write ups.

The girlfriend had some time off so I was spending some time with her, now she is busy again I’m back to doing some analysis.

Please, if you have any suggestion let me know!