#14 Illumina Dominates Genetics, But Is The Price Attractive? - Podcast Transcript
Updated: Jul 17
Welcome to episode 14 of the Stock Market Ideas podcast. Today I want to talk about a company Called Illumina incorporated which is ticker symbol ILMN on the Nasdaq. Make sure you check out my new website at www.StockMarketIdeasPodcast.com where I’ll be posting information about the companies I’m looking at and I’ll have a page dedicated to watching the stocks I’ve mentioned in past episodes and how they have performed since then. Let’s get started.
Thank you very much for tuning in today. Let’s get into a look at Illumina which is a leader in the genomics industry. It develops manufactures and markets integrated systems for analyzing genetic variation and biological function. They manufacture a line of products and services all having to do with gene sequencing, genotyping and gene expression. Based out of San Diego, California, customers of this business include genomic research centers, pharmaceutical companies, biotech companies, academic and research organizations, and others. Right off the bat this is the kind of company that will require a lot more in depth study to figure out exactly why it's unique and how its business model is something that can be sustained well into the future against competition. Importantly, this entire field and the applications for genomics will continue to grow for years. So, there is plenty of opportunity for Illumina to create new product lines and develop deep and lasting relationships with clients who are themselves breaking ground into new ways to use genetics in science and medicine.
Financial analyst Andres Cardenal who writes “The Data Driven Investor” newsletter on Seeking Alpha wrote a bullish article about Illumina A few weeks ago highlighting this business as well positioned to grow for years to come with very strong financial strength and rock solid competitive strengths. He gets in depth about how the business model of Illumina will position it to retain a strong competitive advantage, and particularly how Illumina has reduced the cost of genome sequencing so vastly compared to how expensive it was in the past, the advantages delivered to customers make it a strong leader here. So if you're interested, search for Andres Cardenal and the data driven investor on Seeking Alpha to take a look at his past work and consider subscribing to his newsletter if the types of businesses he writes about are interesting to you.
If we jump into some of the fundamentals I'm paying attention to, it's easy to see why Financial strength is very good with this company. A Return on invested capital of 23.4% against a weighted average cost of capital Of 6.3% tell us that this business is able to use Capital very effectively. So even though there are total liabilities of a little over $2.6 billion, of which current liabilities is a little over $1 billion, Total Assets of $7.4 billion which includes over $4.3 billion in current assets give us a company that has a strong balance sheet which which is more important than ever when looking at a business to invest in.
Profitability is very healthy at Illumina. Operating margin is over 27%, net margin over 28%. The gross profit margin has consistently been roughly between 65 and 70% over the last 10 years, which certainly speak to the dominant position this business has in this field. When margins are this high, it is very conceivable to think that competitors will be thinking of ways to take market share, but the consistency of these numbers and the complexity of the work being done perhaps make it a fairly high barrier to entry. There is a history of merger and acquisition activity as well which will probably continue to be a factor going forward. The most recent of this activity being a deal which fell apart earlier this year for Illumina buying Pacific Biosciences. So from what I can tell, I don’t see Illumina being overtaken in market share any time soon and I’m sure we can expect future acquisitions to take place as long as it makes sense while this industry grows.
Let's talk a little bit about valuation. A price to earnings ratio of almost 60 at first glance is a very high number and can be a bit nerve racking. However, there are a number of reasons why even with a PE this high, it could still be an undervalued business. The first thing that I notice is that on a historic basis Going back 10 to 15 years, it has maintained an average price to earnings ratio of 69.5 roughly. We've already seen that profitability and growth with Illumina is very high. So, if we can expect a combination of strong growth, profitability and cash flow for years to come, we could still be looking at an undervalued company even if the PE is higher than the market average, historically speaking. On a discounted cash flow basis, we need to see a growth rate of at least 20% or higher continue for years to come, in order to say that today’s price on the stock is at least fairly valued or undervalued. Having said that, it’s also worth noting that this business is at around all time highs in stock price, and has jumped almost 80% since a sharp decline in March just 4 months ago.
Nonetheless, there is no real reason to believe this stock will decline as much as it did earlier this year, and as always, anything can happen. The best decision we can try to make as investors is to look at the overall business, decide what it’s truly worth today, and if there is a discount reflected in the market valuation, to invest, and wait patiently for others to come to that same realization. From what I have seen I think this is a very high-quality business that will do well for many years to come.
Thank you again for tuning into this episode. Have a fantastic day and bye for now.