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Better Buy: Illumina vs. Thermo Fisher Scientific

Thermo Fisher Scientific (NYSE: TMO) and Illumina (NASDAQ: ILMN) are two companies investors interested in genetics will want to keep a close eye on. Both stocks have done very well over the years, currently trading near their all-time highs. Although they've done well in the past, determining which one is the better buy here on out is a more difficult question to answer -- one that requires assessing where the companies are today, their relative valuations, and overall risk level.

Thermo Fisher Scientific is safe, but is it a good option for growth investors?

With a broad mix of revenue from multiple segments and consistent profits, Thermo Fisher Scientific offers investors stability and predictability. The company has taken on several acquisitions over the years to help with the growth of its top line, including the purchase of genetic testing company Life Technologies for $13.6 billion in 2014. From $16.9 billion in revenue in 2014, the company reported $24.4 billion in sales in 2018, an increase of more than 44% in four years.

Amid all those changes, Thermo Fisher Scientific has continued to produce a strong bottom line, with its net income rising steadily during that time from $1.9 billion to nearly $3 billion in 2018. A big part of what makes the company such a stable buy is its different segments. Laboratory products and services make up more than 40% of the company's sales while life sciences solutions and analytical instruments account for 27% and 22% of revenue, respectively.

Image source: Getty Images.

Good diversification can make Thermo Fisher Scientific an attractive investment, but the company's level of growth may not be that high for growth investors. Over the past nine months, the company's consolidated revenue has increased by just 4.8%. The life sciences segment led the way with sales growth of 9.8%, but laboratory products and services were up 4.5% and the other segments showed less revenue growth. That level of growth makes it hard to justify Thermo Fisher Scientific's 36 price-to-earnings (P/E) multiple. Even its price-to-sales (P/S) ratio of five is a bit high.

For dividend investors, the company's dividend yield of 0.23% is far below the 1.85% investors can find with the S&P 500 index.

Is Illumina diversified enough?

Illumina is a much smaller company than Thermo Fisher Scientific, with a market cap of $47 billion compared to Thermo's $129 billion. Revenue for the gene-sequencing company has been more modest as well, with Illumina reaching more than $3 billion in sales in 2018. Illumina is a leading company in genetics, but the downside for investors is that it just doesn't offer the same type of diversification that Thermo Fisher Scientific does. And with sales growth of just 5% during the past nine months, it's had similar problems growing its top line organically.

To make matters worse, earlier this month, Illumina called off an acquisition of a rival biotech company, Pacific Biosciences. This comes after the Federal Trade Commission challenged the acquisition last month, pointing to Illumina's dominant position in the industry as a concern, stating that "These deals help monopolists maintain power. That's why we're challenging this acquisition." Some estimates show Illumina as having 70% market share in gene sequencing, so swallowing up a smaller rival is an understandable concern for regulators.

Nonetheless, it's disappointing news for Illumina. The company's CEO Francis deSouza was optimistic about what the deal could have done for the company, stating, "We believe this proposed combination would have broadened access to Pacific Biosciences sequencing technology, significantly expanded and accelerated innovation, and ultimately increased the clinical utility and impact of sequencing." The abandoned deal raises questions about the company's future and where Illumina may go from here.

At an even higher P/E of 49 and a P/S of just under 14, investors are paying a large premium to own Illumina shares today. The company also does not pay its shareholders a dividend.

Thermo Fisher Scientific is the better overall buy

Both of these stocks are expensive buys today. But if you're looking at owning one of these healthcare stocks, Thermo Fisher Scientific offers investors a lot more for their money. Not only is the stock trading at a lower valuation, but its business is more diverse, and that's important if one segment of the company's operations slows down. And with $3.9 billion in free cash flow over the past 12 months, Thermo Fisher Scientific has plenty of cash should it decide to take on more acquisitions. Illumina, meanwhile, has generated just $691 million over the same period.

Thermo Fisher Scientific's stronger financial position makes it more likely that the company can handle any adversity that comes its way while also taking advantage of opportunities that arise. That's why in both the short and long term, Thermo Fisher Scientific is the better all-around investment.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.


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