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50 25 41 30 16 14 27 15 14
P/E ROE EV/EBITDA
ILMN Industry Sector
-5%
15%
35%
55%
75%
N D J F M A M J J A S O N
ILMN S&P 500
DCF Target Price $294.02
Current Price $310.39
52wk Range $372.61-$203.83
Key Statistic:
Market Capitalization $47,783million
Shares Outstanding 147million
Avg. Daily Vol. (3 Mo.) 1,031,553
Institutional Ownership 89.80%
5yr weekly ß 1.197
WACC 9.50%
Dividend Yield 0
Est. 10 yr. Growth 5%
P/E (TTM)
P/E (FY1)53.5
67.35
Financial Strength:
Operating Margin (TTM) 28.22%
Profit Margin (TTM) 21.09%
Return on Asset (TTM) 9.69%
Return on Equity (TTM) 18.91%
ROIC 23.69%
Debt/Capital Ratio 28.7%
Revenue $2.752 Billion
After-Tax Income $678 Billion
Analysts
Krause Fund Research
Fall 2018
Target Price: $294-$315 Company Overview
Health Care - Life Sciences Tools & Services
Jiaming Lin
Shunshun Zhang
Chuanxu Ao
Jongwuk Rhim
HOLD
NOV.9,2018 Stock Rating:
Investment Thesis
(Nasdaq-ILMN)
12 Month Performance
Earnings Estimates
Relative Financial Performance
Year 2015 2016 2017 2018E 2019E 2020E
EPS 3.19 3.09 4.96 4.33 5.32 6.43
Growth 22.2% -3.1% 60.5% -12.6% 22.8% 20.7%
Investment Positives:
High market share: Illumina Inc. currently has 75% of share market in
genetic testing industry. Illumina provides customers with the most advance
genetic testing equipment and the most complete genetic testing service. Its
products and services has become the standard of the industry.
Positive Acquisition: Illumina currently acquired Pacific Biosciences
which is expert in long-read sequencing technology. Long-read sequencing
technology will complement the variety of Illumina’s technology. This
acquisition not only drag Illumina’s stock price, but also boosted its stock price
by 4.8%. This can reflects investor’s confidence on Illumina, and also reflects
that Illumina has a sufficient free cash flow.
Oversold: ILMN is trading at a relative strength index (RSI) of 28
suggesting that the stock is oversold. While the price have nearly 13% on high
option volume, we believe that the pullback provides a favorable entry point.
Investment Negatives:
Potential ineffectiveness of research investment: Illumina spends more
than 20% of revenue into research and development. A potential earing
downturn could occur if the R&D outcome exceeds the market demand.
Illumina Inc. (ILMN) is the global leader in sequencing and array-based
solutions for genetic analysis. The company’s products and services are sold to
genomic research centers, academic institutions, laboratories, and hospitals, as
well as to pharmaceutical, biotech, agri-genomics, and consumer genomics
business.
1
We recommend a HOLD rating for Illumina Inc. (ILMN) with a
target price of $294.02. This well-managed company makes
integrated system for sequencing and analyzing DNA. Their
products play a critical role in developing targeted, genetic-
based treatment for a wide range of medical conditions.
Currently, ILMN dominates about 75% of world genetic
sequencing market with its highly-noncompetitive Next
Generation Sequencing machine. Its leading position in genetic
testing industry and advance technology in genetic testing will
empower its stock price with a long lasting momentum.
After inputting our positive forecasts for the company’s future
revenue and operation efficiency, the Illumina’s intrinsic value
calculated by DCF model is $294.02, which is lower than the
current price. We think it is because the market has included
these positive assumption into the stock price. Therefore, we
recommend a HOLD rating.
Demographics:
The demographics of the United States and the world is one of
major macroeconomics factors that affect the healthcare sector.
According to the US Department of Health and Human. There
were 3.85 million newborn babies in United States in 2017 which
is less than 3.95 million in 2016. The newborn babies’ rate has
shown a decrease trend1. Based on Population Reference
Bureau’s forecast2, the number of Americans ages 65 and older is
estimated to increase to 98 million by 2060, compared with 50
million today. In addition, the average life expectancy is also
increasing due to the reduction in mortality rate in older ages.
Both aging problem and increasing life expectancy could lead to
a higher demand for medical care and an expansion of healthcare
services, because the aging population is more prone to chronic
disease and injuries3. According to “Our World in Data”, It is
estimated that there were 42 million people who suffered from
any form of cancer globally. The data has been double since 1990
when only 19 million people suffered from the cancer4. The graph
below shows a clear upward trend of the number of people with
cancer in some reprehensive countries5.
Figure 1: Newborn babies in U.S. yearly data
Figure 2: Number of people with cancer
Source: Our World in Data
Down syndrome is another important factor in the demographic.
There are about 6000 babies born in United States have Down
syndrome every year which means 1 out every 700 babies has
Down syndrome6. A new baby will be born in the United States
every 8 seconds7, which means a baby with Dow syndrome will
born every 93 minutes.
All of above symptoms can be detected by Illumina’s gene
testing machine in the early stage, so people can be prevented
from the worst case. We believe the stable growth of potential
customers of Illumina will significantly boost Illumina’s
revenue and sales in the future.
U.S. Real Gross Domestic Production
Real gross Domestic Production (Real GDP) is an inflation-
adjusted measurement, which can represent the value of all
goods and services produced by an economy in a given year. A
positive real GDP is very crucial for an economy since positive
GDP growth indicates that the economy is healthy.
Figure 3: US GDP Growth Rate
ECONOMY OUTLOOK
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Q1'11
Q3'11
Q1'12
Q3'12
Q1'13
Q3'13
Q1'14
Q3'14
Q1'15
Q3'15
Q1'16
Q3'16
Q1'17
Q3'17
Q1'18
EXECUTIVE SUMMARY
4.00 3.95 3.95 3.93 3.99 3.98 3.95 3.85
-3.15%
-1.25%
0.00%-0.51%
1.53%
-0.25%-0.75%
-2.53%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
2010 2011 2012 2013 2014 2015 2016 2017
3.75
3.80
3.85
3.90
3.95
4.00
4.05
Newborn number YoY Growth
2
Source: Trading Economics
Real GPD increased at 4.2% and 3.5%8 in quarter two and three
of 2018, respectively. We think these increases were primarily
due to the tax-cutting policy that was announced in January
2018. The tax-cutting policy created a better investing
environment and people will be more confident to invest.
The consensus forecast about 2019 GDP growth rate is 2.2% -
2.6% 9.The main reason that our analysts think this forecast is
too pessimistic is the impact from the ongoing trade war
between China and U.S. However, we think the trade war do not
have a significant impact on U.S. economy since U.S. has a
higher import than export10. Tariffs that put on import good
from China will lead to a lower import amount, which will
result a higher net export (higher GDP). Therefore, we
anticipate that the real GDP growth will be higher than the
consensus, which is 3.0% in 2019.
PMI
Global PMI is a survey index that measures the purchasing
managers’ opinions on future economic health of production
and supply. For the Health Care sector, the PMI is a key
indicator for the health of manufacturing side of the Health Care
sector. With a more confident PMI level, the purchase managers
come a greater willingness to expend the production. A PMI
above 50 represents an expansion when compared with the
previous month. Historically, PMI index increases during
expansionary periods. Global PMI hits 3-year high of 54.5 in
Dec. 2017. 2018 followed by a decrease to 52.1 in Oct. 2018.
We attribute the decrease of the manufacture confidence to the
uncertainty surrounding the trade conflict with China. The threat
of a trade war and further tariff barrier would mean decrease in
export as well as an increase in cost of production. We expect
the PMI will keep decrease if the trade war tension will not ease.
Figure 4: Global Manufacturing PMI
Source: Bloomberg
Government Regulation
Historically, the U.S healthcare sector is one of the most
regulated sectors at both state and national level. The U.S. Food
and Drug Administration (FDA) is the major federal regulatory
agency in the U.S. The FDA regulates the sector by approving
manufacturers’ products prior sales. Most of medical devices are
regulated under the United States Food, Drug, Cosmetic Act
(the “FD&CA”). The FD&CA requires all of medical devices
sold in the US to be safe and effective for intended use. In
addition to federal regulations, companies that sold their
medical devices to the foreign countries also subject to foreign
countries’ laws.
The trend for approval of drugs from FDA has dropped sharply
in 2016; however, by 2017 the number has recovered. In 2018,
FDA, compared with 27 in the previous year, has approved 35
medical devices. President Trump is fostering the approval to
increase the competition, which leads to a cost-cut for the
customers. We anticipate the number of approvals of medical
devices will increase due to companies’ trend of increasing
R&D expenses. The received approvals of the product from
FDA and foreign regulations could boost the company’s net
sales due to highly demand of the products from pregnant
women and aging population.
U.S. Tax Cuts and Jobs Act. The U.S. Tax Cuts and Jobs Act
(the “TCJA”) was enacted into law on December 22, 2017. The
TCJA made significant changes to the Internal Revenue Code,
including, but not limited to, a corporate tax rate decrease from
35% to 21% effective for tax years beginning after December
31, 201711.
Industry Description
Illumina is classified in the life science & technology industry
under GICS standard, overlapping with them being in the
healthcare equipment & supplies industry. Because the unique
aspect of genetic testing business and enough research coverage
on genetic testing and NGS sub-industry, we decide to use genetic
testing sub-industry as a basis for our industry analysis and peer
evaluation. Genetic testing is a type of medical test that identifies
changes in chromosomes, genes, or proteins. The results of a
genetic test can confirm or rule out a suspected genetic condition
or help determine a person’s chance of developing or passing on
a genetic disorder. The two major market for genetic testing
services is parental & new born testing and cancer diagnostic
.More than 1000 patents are currently in used in the market, and
more are being developed12.
50.651
52
52.952.7
54.5
53.1
52.1
49
50
51
52
53
54
55
INDUSTRY ANALYSIS
3
Precision Medicine Initiative (PMI) is an emerging approach for
disease prevention and treatment that takes into account
individual variation in genes. Precision medicine offers
personalized medical treatment to patients based on their
molecular basis. Taking oncology target therapy as an example,
precision medicine requires a substantial amount of genetic
testing services at diagnosis and treatment period. We see the
increasing demand for precision medicine such as oncology
target therapy as a growth opportunity for genetic testing
industry13.
Market Size and Trends
According to McKinsey research, the next-generation sequencing
market (product) is projected to grow at an annual rate of 20
percent from 2017 to 2022. While Global genetic testing
(services) market size was valued at USD 10.6 billion in 2017 and
is expected to witness more than 11.6% CAGR from 2018 to
2024. We see the increasing demand for precision medicine such
as oncology target therapy as a growth opportunity for genetic
testing industry14.
Figure 5: 10-yr NGS Product Market Estimation
Figure 6: Genetic Testing Services Market
Source: Global Market Insight
Technological advancement in genetic testing is expected to drive
the genetic testing market during the coming years. The demand
for genetic testing is increasing across the globe owing to the
availability of new tests as well as advancement in the genetic
testing techniques. Innovations in tests that offer safer and
efficient techniques of disease detection, surpassing the risk of
miscarriage during early stages of pregnancy will serve to be a
high impact rendering factor that will drive the genetic testing
market growth during the forthcoming years15. Business Segments
Based on test type, the genetic testing market is divided into
diagnostic testing (including oncology diagnosis), prenatal &
newborn testing, carrier screening, and others. Prenatal &
newborn testing is a relatively-early-development for genetic
testing technology. None—Invasive Prenatal Testing (NIPT) is
the main application in this market with foreseeable growth in
replacing the traditional amniocentesis. Oncology diagnosis
testing is on the growing stage to become the main segment in
genetic testing market as the technological advancement. We
anticipate that demand for the NGS platform will increasing
heavily in recent few years drive by the new improvements in
accuracy of cancer sequencing and development of target therapy.
Figure 7: Genetic Testing Market Classification by Products
Source: Global Market Insight
Porter’s 5 Forces
Competitive Rivalry: Moderate
Although there are hundreds of firms in the genetic testing
industry. The competitive environment is very different between
services and products market. There are only few manufacture of
NGS platform including illumina. Our targeted company illumina
Genetic Testing Market
Test Type
Diagnostic Testing
Preental & Newborn Testing
Carrier Testing
Others
Application
Cancer Diagnosis
Genetic Disease Diagonosis
Cardiovascular Disease
Diagonosis
Others
4
is placing themselves as a NGS manufacture and consumables
producer. In 2017, illumina maintains about 63% of the
sequencing NGS market share. With recent acquisition of PacBio
(2% of the market share, the only competitors left in the market
is Themo Fisher, Roche and BGI Genomics. By comparing their
NGS platforms we find out that illumina ‘s products have the
most competitive advantage among all. Thus we consider the
competitive rivalry moderate to low.
Figure 9: Competitive landscape
Source (FactSet)
Threat of New Entrants: Low
As the cost of sequencing decrease with the Mole’s law- speed,
the entrance barrier will be lower for service company. However,
on the production side, as the major NGS manufactures
developed in size and technology. More capital is spent on R&D
from the larger firms. And more FDA approval are issued to the
major companiesWe anticipate that the threat of new entrants is
very low.
Power of Suppliers: Moderate
The main suppliers in this industry are firms that provide raw
materials to be used in the production of medical devices and
supplies. While companies in the industry are often large enough
to bargain on price, raw material suppliers do not have a
monopoly, Meanwhile, global markets also allow firms to access
supply markets in different economy. In fact, many firms tend to
develop production facilities overseas to reduce the cost. The
ongoing trade war might affect domestic production as we
mentioned in the economy overview.
Power of Buyers: Strong
The buyer of NGS products and services includes genomic
research centers, & academic institutions, government &
commercial laboratories, and hospitals, as well as to
pharmaceutical, biotech, agri-genomics, and consumer genomics
business. Thus we conclude the power of buyer is strong in this
industry.
Threat of Substitutes:
Because of the unique characteristic of DNA fluid test. The
current threat of substitutes is technological advancement within
the genetic testing sub-industry.
Company Overview
Illumina, Inc. has been a leading company in the genetic testing
and diagnostic industry since it was incorporated in 1998. The
company manufactures, markets and develops a comprehensive
line of products used to analyze genetic research and variation.
Its products include the machinery and software used to
sequence pieces of DNA and RNA and services to test genetic
variation and biological function. Currently, Illumina holds an
estimated 75% market shares in the genetic testing market16. In
order to retain its dominant position in the market, on November
1, Illumina announced to acquire its rival Pacific Biosciences
for approximately $1.2 billion17.
Corporate Strategy
Operating in a surging and highly competitive market, Illumina
has to keep developing its technology in order to maintain its
dominant position in the market. The company’s general
corporate strategy is to establish Illumina’s product as the
standard method for noninvasive prenatal testing (NIPT)
globally and to explore the oncology market by utilizing
ILMN’s technology for cancer treatment.
One of the ways to achieve its corporate strategies is to invest
capital resources into research and develop its products. Facing
the constant threat of competitiveness from new technologies,
Illumina historically invested substantial amount of capital
Illumina63%
Thermo Fisher
Scientific10%
BGI Genomics
7%
Berry Genomics
4%
Pacific Biosciences of California
2% Others6%
COMPANY ANALYSIS
Thermo Fisher
Scientific Inc.
PerkinElmer Inc.
Agilegent Technologie
s Inc.
Bruker …
Bio-Techne Corp.
Pacific Biosciences
illumina
0
5
10
15
20
25
0 20,000 40,000 60,000 80,000 100,000 120,000
5-y
r gr
ow
th r
ate
Market Cap
5
resources in research and development. For the year ended
December 31, 2017, research and development expenses were
$546 million, which is 20% of total revenue.
Illumina also contributes in collaborations with other companies
in different fields. Aiming to explore the oncology market, in
April 2018, Illumina strategic collaborated with Bristol-Myers
Squibb, a major player in oncology market. Through the
collaboration, it is enable Illumina to expand its oncology
offerings for NextSeq™ 550Dx, one of Illumina’s assay
products18.
Moreover, in November, Illumina’s announcement to acquire
Pacific Biosciences is another signal that the company is trying
to consolidate its market position. The Pacific Biosciences, one
of Illumina’s competitors, develops DNA long-read technology,
while Illumina is currently based on its short-read technology.
Through the combination of long-read and short-read
technology, we believe that it could help the company increase
its competitiveness by improving both speed and accuracy of
their sequencing instrument, reach to more applications and
expedite the technology development19.
Financial Analysis
For the third quarter of 2018, Illumina’s total revenue grew to
$853 million, which is 19.47% higher than 2017 third quarter
revenue. This quarter’s non-GAAP EPS was $1.52 which beat
earning estimate by 36.9%. From 2012 to 2017, Illumina
generated solid revenue and EPS CAGR growth, with 19% and
20% respectively. The revenue CAGR growth rate is much
higher than the industrial CAGR of 11.6%20. The company does
not pay a dividend to its shareholders and not plan to distribute
dividend in the future.
According the company’s quarterly report, Illumina authorized a
share repurchase program to repurchase $150 million of
outstanding common stock in May 2018. The company
repurchased 0.3 million shares for $103 million in the third
quarter. There are $147 million remaining on its share
repurchase program.
After analyzing the company’s financial status, we are positive
about the Illumina’s future stock price and financial
performance. After finishing the acquisition of Pacific
Bioscience, the company’s product line will be more
comprehensive and further strengthen its market position;
therefore, the net revenue will continue to increase.
Life Cycle
We categorize Illumina as a company in growth stage based on
its financial status and ongoing development in the field.
Research and development cost has increased from $401 million
in 2015, $504 million in 2016 to $546 million in 2017. Looking
at news presses and reports Illumina constantly invests money in
technology. Illumina’s R&D expenses percentage of sales,
19.81%, is much higher than that of Thermo Fisher Scientific,
4.25%, which is a major Illumina’s competitor21. The recent
announced acquisition also shows a potential advanced
development of technology in the future.
Looking at the cash flow, we can see that cash is steadily spent
in purchase of property and equipment’s. The company's net
cash from operations is increasing and we can see a fast increase
of money spent for strategic investments in the investing
activities. The company also conducted share repurchase system
to increase the shareholder's value recently.
Figure 9: Illumina Revenue Trend
Source: Illumina Form 10-K 2017 24 and Form 10-Q 2018 Q2 27
Product Lines
Illumina categories its products & services into three segments:
Instruments Segment and Consumables segment and Services.
A large portion of the company‘s sales comes from Sequencing,
In addition, 2017 instrument sales comprised 19% of total
revenues for the fiscal years ended December 31, consumable
sales represented 64% of total revenues and services contains
17% of total revenues.
Figure 8: Illumina Product Lines
Source: Illumina Form 10-K 2017 24
1,421
1,861
1,421
2,220
2,752
1,261
1,612
0
500
1,000
1,500
2,000
2,500
3,000
2013 2014 2015 2016 2017 2017 2Q2018 2Q
Instruments
Sequencing
Arrays
Consumables
Kits
Flow Cells
Microarrays
Services
WGS
Genotyping
NIPT
Product Supports
6
Figure 9: Product Contributions to Total Revenues
Source: Illumina Form 10-K 2017 24
Illumina Inc.’s main revenue come from its consumables
products. Illumina’s sequencing instruments can only support its
own reagent kits and authorized manufacturer’s kits.
Instruments:
Illumina’s instrument parts contain two types of products –
sequencing and arrays. Both products are used in the process of
gene testing. Illumina’s revenue generated from its instruments
portion decreased $126 million, or 21%, to $469 million in 2016
compared to $595 million in the prior year. The main reason of
decreasing of instrument sales is due to the lower demand of the
market. However, Illumina’s revenue from instruments portion e
increased $46 million, or 10%, to $515 million in 2017
compared to $469 million in 2016. The main contributor for this
increase is the introduction of new sequencing machine –
NovaSeq. This is a clear signal new generation of instrument
will significantly boost its sales.
Figure 10: Sequencing Vs. Array as Percentage of Total
Instrument Revenue over the past 3 years.
Source: Illumina Form 10-K 2017 24
Consumables:
There are three main products in the consumable segment,
including sequencing kits, flow cells, and microarrays. In 2017,
consumable revenue increased 14% to $1,753 million compared
to $1,543 million in 2016. The consumables revenue is driven
by growth in the sequencing instrument installed base. We
believe that with the growth in instrument sales, consumables
revenue will also continuously increase in the future.
Services:
Whole-Genome Sequencing (WGS) and Non-Invasive Prenatal
Test (NIPT) are the two types of services that Illumina currently
provides to the consumers. Revenue that generated from its
services and others increased $97 million, or 27%, to $463
million in 2017 compared to $366 million in 2016. This increase
is mainly contributed by Illumina’s gene testing services and
extended instrument service contracts associated with a larger
volume of instruments sales.
Marketing Strategy
Illumina targets the both life science and clinical genomics
markets. Historically, Illumina‘s core business has been in the
life science and research market. But now Illumina mainly focus
on the enabling translational and clinical markets through the
introduction of NGS sequencing instruments and reagents kits.
The company target its growth primarily in NIPT and oncology
markets.
Illumina distributes products directly to customers in North
America, Europe, Latin America, and the Asia-Pacific region. In
each of these areas, dedicated sales, service, and application-
support personnel are expanding and supporting their respective
customer bases. In addition, Illumina sells through life-science
distributors in certain markets within Europe, the Asia-Pacific
region, Latin America, the Middle East, and South Africa. The
company expect to continue increasing its sales and distribution
resources during 2018 and beyond as Illumina launches new
products and expand potential customer base
Recent Development – Acquisition
Illumina recently acquired a gene sequencing company Pacific
Biosciences (Ticker: PACB) for $1.2 billion in cash. Illumine
acquired Pacific Biosciences at an $8 per share price with a 71%
premium. Pacific Biosciences has more advance technology and
more experience on long-read sequencing technology which
Illumina does not have. Therefore, this acquisition will help
Illumina better pave the path to a perfect view of genome. The
short-read sequencing platform can address the majority of
sequencing application. However, there are still some
applications which only long-reads sequencing platform can
19%
20%
27%
64%
64%
58%
17%
16%
15%
20
17
20
16
20
15
Instruments Consumables Services
2015, Sequencin…
2015, Arrays,
14%
2016, 84%
2016, 16%
2017, 83%
2017, 17%
7
accurately address22. The long-reads sequencing market
opportunity is also expected to grow to $2.5 billion by 202223.
Therefore, acquiring Pacific Biosciences will help Illumina
enhance its leading position in genetic testing industry.
More importantly, this acquisition not only did not decrease its
stock price, but also boosted Illumina’s price from $ 312 per
share to $327 per share on November 1, 2018. This
phenomenon reflects that the investors are optimistic about this
acquisition because investors think that it will significantly add
value to Illumina.
SWOT Analysis
Strengths
Intellectual Property Portfolio: An extensive intellectual
property portfolio and advanced technology for the
analysis of genetic variation and biological function lead
the company to an edge position in the genetic diagnostic
market. By the end of 2017, Illumina had 719 issued US
patents and 473 pending US patent applications, including
32 allowed applications that have not yet issued as patents.
The intellectual property portfolio covers various product
lines, including arrays, sequencing technology, software,
instruments, digital microfluidics etc.
Unique sequencing platforms: Illumina has unique
sequencing platforms supporting the needs for whole-
genome, de novo, exome and RNA sequencing, and
targeted resequencing of specific gene regions and genes.
The sequencing platforms is one of the major driver of
company’s revenue. It helps the company keep a leading
position in sequencing and array-based solutions24.
Low Cost of Genome Product: Since 2009, the price of
human whole genome sequencing has continuously fallen
from US$200,000 to US$1,000. Current price of Illumina’s
genome sequencing product is about $800, which is an
affordable price for most of people. Its two main
competitors, Veritas Genetics and Dante Labs, are offering
$1000 and $699 for genome sequencing products.
However, Illlumina’s product has a shorter run time and
lower error rates compared with the other two companies’
product. Illumina’s CEO Francis deSouza anticipated that
one day in the future, the price of whole genome could
decrease to less than US$100. The decrease in sequencing
cost makes more used for genome sequencing became
practical. The lower cost and higher speed could bring a lot
of potential customers and enhance the company’s market
share25. (Source:
https://techcrunch.com/2017/01/10/illumina-wants-to-
sequence-your-whole-genome-for-100/)
Weaknesses
Geographic Concentration4: Based on the data shown on
the company’s annual report, the revenue generated from
the US accounted for 55%, 54%, and 54% of total revenue
for the years ended December 31, 2017, January 1, 2017,
and January 3, 2016, respectively. Highly geographic
concentration may have a negative effect on business
operation due to potential economic or political change.
However, the company currently starts to expend its
oversea market, especially in Greater China region. It
could offset some of geographic concentration risk.
Liquidity Risk: We have introduced the potential positive
perspectives of the recent announced acquisition, but we
also recognize the potential liquidity risk of the acquisition.
According to Illumina’s announcement, the company plan
to acquire Pacific Biosciences for $1.2 billion in cash.
However, the amount of cash appeared on the Q3 2018
balance sheet is $1.346 billion. The $1.2 billion cash
payment is around 89% of current total cash. Therefore, we
are worried that the company has the possibility of
encountering liquidity shortage after finishing the
acquisition.
Opportunities
Strategic Agreements and Collaborations: Illumina’s
strategic agreements and collaborations enhance the
company’s leading position in the market and strengthen
its business operation. In 2017, Royal Philips, a global
company in health technology, and Illumina entered in a
partnership to offer integrated genomics solutions for
oncology. On April 13, 2018, Bristol-Myers Squibb
Company (NYSE: BMY) and Illumina announced a
collaboration to utilize Illumina’s next generation
sequencing (NGS) technology to develop and globally
commercialize in-vitro diagnostic (IVD) assays for BMY’s
oncology immunotherapies. In the same month, Loxo
Oncology and Illumina partner together to develop NGS
based pan-cancer companion diagnostics. We believe that
these strategic collaborations could help Illumina explore
market on the oncology field and advance company’s
technology.
Threats
Highly Competitive Market: Illumina is operating in an
intense competitive market. Illumina competes with the
companies involved in the market for analysis of genetic
variation and biological function. The company is under
great pressure of price competition and technology
innovation from its peer companies. The intense
competition from existing and potential competitors could
cause company’s product obsolete, a significant decrease
in sale, or price reduction.
Decreasing trend of newborn babies: The amount of
newborn babies in United States has shown a decreasing
8
trend. Illumina, as a medical equipment, is heavily
depended on growth of population. Slowing in growth of
population will be harmful for Illumina because less
people means less potential patients which will potential
decrease Illumina’s future revenue, especially for its
noninvasive prenatal testing (NIPT) services which is an
advance gene testing technology for pregnant women.
According to our analysis on economy, industry and the
company, we forecasted Illumina’s future 10-year revenues and
expenses based on various assumption in our models by the
company’s historical financial performance. Our analysts
recommended HOLD rating for Illumina based on the estimation
of intrinsic value range from our valuation models.
Key Assumptions
Revenue Decomposition
Illumina have changed their reportable segmentation in FY2017.
We estimate revenue based on their previous reportable products
& services segmentation. So the growth rate will be comparable
to the historical data.
Product
Product revenue include sales from illumina’s NGS and other
sequencing platforms and sales from consumables such as
sequencing kits. As we previously mentioned in the company
analysis. The product revenue is the main source of revenue for
illumina. The 2017 year on year growth rate is about 13%. We
estimated a strong growth on their consumables based on the
company’s product transition, and Medicare coverage for
genetically based cancer testing following a recent CMS decision.
Moreover we foresee a strong global which will also boost
illumina’s product sale in the near future. We estimate the product
revenue will increase by 20% in 2018 according to management
guidance and new NovaSeq market. We use the estimated NGS
market year on year growth rate as the following year on year
growth rate.
Services
Services is growing segment for Illumina. However the
competition in genetic testing services is very high. We predicted
the growth for services will be 30% in following a strong growth
from 2017. And future revenue growth rate will be gradually
decrease to the market growth rate.
Weighted Average Cost of Capital
Based on our analysis and calculation, we get a WACC of
9.33%. The WACC includes an equity weight of 96.1% and a
debt weight of 3.91%. We believe that the company’s capital
structure is not going to change and the WACC keeps at 9.33%
in the long-term.
Cost of Equity
We calculated our cost of equity based on the Capital Asset
Pricing Model (CAPM). The Beta used in our model is 1.197
which is from Bloomberg’s raw 5 year weekly beta for Illumina.
We use a 3.15% risk free rate, which is the current 10-year U.S.
treasury rate. We use 5.32% as market risk premium, which is
from Prof. Damodaran’s published market risk premium. The
Illumina’s cost of equity is equal to 9.52%.
Cost of Debt
The pre-tax interest rate on the company’s long-term debt is
6.02%. The current marginal tax rate is 21%. Therefore, the
after-tax cost of debt is 4.76%.
WACC Weights
The market value of equity is calculated by multiplying current
Illumina’s share price with number of shares outstanding. The
market value of equity that we get is $45.627 billion. According
to the company’s annual report, Illumina currently owns $1.348
billion long-term debt and $509.07 million operating leases.
Thus, the weight of equity is equal to 96.10% and the weight of
debt is equal to 3.91%. Thus, the WACC is equal to 11.63%.
Valuation Models
There are four primary models that we use to evaluate Illumina’s
stock price. The four valuation models are Dividend Discount
Valuation, Discounted Cash Flow Model, Economic Profit
Model and relative valuation.
Discounted Cash Flow & Economic Profit Models
We believe our discounted cash flow (DCF) model and economic
profit model (EP) provide us with the most accurate intrinsic
price for the Illumina Inc. These models have incorporated all
main value drivers including net operating profit less adjusted tax
(NOPLAT), invested capital (IC), free cash flow (FCF), weight
average cost of capital (WACC), return on invested capital
(ROIC), and economic profit (EP). The price that we calculated
by using these two models are $271.69 per share, and $294.02 per
share after the partial year adjusted. We believe this price reflects
the intrinsic value of the company. The adjusted target price is
5.27% down from the current market price. Therefore, we
think that Illumina Inc. is slightly overvalued based on the
models.
Dividend Discount Model
The dividend discount model (DDM) provided us an intrinsic
value of $147.80 per share, with a partial year adjusted price of
$159.94 for Illumina Inc. However, we think the DDM does not
provide us with any useful information since Illumina did not pay
VALUATION DISCUSSION
9
any dividend, and Illumina also declared that the company does
not have intention to pay dividends in the foreseeable future in its
annual report.
Relative Price/Earnings Model
The comparable companies used in our relative valuation model
are Thermo Fisher, PerkinElmer, Agilegent, Bruker Corp, Bio-
Techne Corp, Pacific Bioscience, and BGI. We compared
Illumina’s P/E to these peer companies. Our forward 2018 P/E
model produces a price of $148.56 per share for Illumina. Our
forward 2019 P/E model produced a price of $106.43 per
share. In addition to Price/Earning relative valuation model, we
also calculated PEG ratio for each of the peer companies and
averaged the PEG among the peers for the year 2018 and 2019.
According to the PEG 2018 and PEG 2019 ratios, the intrinsic
value of Illumina is $94.68 per share and $96.90 per share,
respectively. However, we think that the implied relative values
obtained from the relative valuation model is not an informative
and reasonable indicator for Illumina’s stock price. Because
Illumina currently dominates the market and has a higher growth
potential compared with the peers. Therefore, we believe that the
value obtained from relative valuation will be much lower than
the actual intrinsic value of Illumina.
Risk free vs CV Growth rate
Risk free is a crucial component for the WACC calculation and
cost of equity. Through us in-depth research of the economy and
industry related news, we decided to have the risk-free rate range
from 2.70% to 3.60%. Increasing the rate of .15% by time,
decreased the stock price sharply in the beginning but smaller at
the end. On the other hand, The CV Growth rate increased sharply
by every increase of .10%. Examining the inverse relation
between these two factors, using 3.15% for risk free and 7.00%
respectively, showed the analyzed stock price at $294.02.
Equity risk premium vs Beta
The equity risk premium is required when calculating the WACC,
but it is still one of the controversial metrics among the finance
professionals. Through our research of different reports and
opinions, we decided to use the range between 5.26% to 5.38%.
A slight increase of equity risk premium decreased the stock price
by $1.6, so we decided to use 5.32% for our risk premium rate.
Beta, which can be another indicator of the risk for the market,
was not very off from the market which is at 1. However,
considering Illumina's market share with competitor's
engagement of the market having 1.197 for beta seems
reasonable.
COGS (% of Sales) vs Marginal tax rate
We tested the Cost of Goods Sold vs. Marginal Tax Rate to
examine the impact of changes of the two factors on the target
price. Based on our sensitivity table, we can see that the change
in cost of goods sold has a significant effect on the company’s
stock price. We expect Illumina to grow faster than the past
performances due to the development of new generation of
sequencing machine. Using the past historical data, the margin
range is 22% to 28%. Increasing the rate by 1% will decrease
Illumina's stock price by about $6. In comparison to the impact
of cost of goods sold, the change in marginal tax rate has a relative
smaller effect on the stock price.
Pre-Tax cost of debt vs Growth of PV operating lease
We test the Pre-Tax Cost of Debt vs. Growth of Present Value of
Operating Lease. Through our sensitivity table, we can observe
that price was not sensitive to these two factors, because the
company currently only owns a small weight of debts.
SG&A (% of Sales) vs R&D (% of Sales)
This analysis tests the changes of SG&A expenses and research
and development expenses as percentage of sales to find how
stock price was affected by these two factors. We observed that
the stock price is sensitive to both changes of SG&A expenses
and R&D expenses margins.
SENSITIVITY ANALYSIS
10
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report was
originally created to offer an internal investment recommendation
for the University of Iowa Krause Fund and its advisory board.
The report also provides potential employers and other interested
parties an example of the students’ skills, knowledge and
abilities. Members of the Krause Fund are not registered
investment advisors, brokers or officially licensed financial
professionals. The investment advice contained in this report does
not represent an offer or solicitation to buy or sell any of the
securities mentioned. Unless otherwise noted, facts and figures
included in this report are from publicly available sources. This
report is not a complete compilation of data, and its accuracy is
not guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a financial
interest in the companies mentioned in this report.
IMPORTANT DISCLOSURE
11
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1
Illumina, Inc.Key Assumptions of Valuation ModelTicker Symbol ILMN
Current Share Price $310.39
Target Price $294.02
Current Model Date 11/13/2018
FY End (month/day) Dec. 31
Pre-Tax Cost of Debt 9.02%
Beta 1.197
Risk-Free Rate 3.15%
Equity Risk Premium 5.32%
CV Growth of Revenue 5%
Current Dividend Yield 0
Marginal Tax Rate 21.00%
Effective Tax Rate 35.00%
Growth of PV operating lease 2.00%
WACC 9.50%
Cost Of Good Sold/Sales 23.00%
SG&A (% of Sales) 18.00%
R&D (% of Sales) 20.00%
Deprecation as % of PP&E 15.00%
Amortization % of Intangible 12.90%
2
IlluminaRevenue Decomposition
(in USD million)
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Product Revenue 1891.00 2032.00 2289.00 2746.80 3246.59 3758.57 4343.68 4965.37 5656.13 6428.16 7326.15 8252.59 8665.22
YoY % 16.76% 7.46% 12.65% 20.00% 18.20% 15.77% 15.57% 14.31% 13.91% 13.65% 13.97% 12.65% 5.00%
Service Revenue 329.00 366.00 463.00 601.90 770.43 970.74 1164.89 1362.93 1553.73 1771.26 2019.23 2261.54 2374.62
YoY % 36.04% 11.25% 26.50% 30.00% 28.00% 26.00% 20.00% 17.00% 14.00% 14.00% 14.00% 12.00% 5.00%
Total Revenue 2220.00 2398.00 2752.00 3348.70 4017.02 4729.31 5508.58 6328.29 7209.87 8199.42 9345.39 10514.13 11039.84
YoY % 19.27% 8.02% 14.76% 21.68% 19.96% 17.73% 16.48% 14.88% 13.93% 13.72% 13.98% 12.51% 5.00%
3
Illumina, Inc.Income Statement
In million USD
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Total revenue 2219.76 2398.37 2752.00 3348.70 4017.02 4729.31 5508.58 6328.29 7209.87 8199.42 9345.39 10514.13 11039.84
Cost of product and service revenue 551.66 598.96 777.00 770.20 923.91 1087.74 1266.97 1455.51 1658.27 1885.87 2149.44 2418.25 2539.16
Depreciation expense 73.00 90.00 110.00 139.65 149.01 161.51 162.67 169.60 176.01 188.44 202.42 215.70 231.64
Amortization of intangible assets, net 45.81 42.96 39.00 22.60 25.52 28.81 32.52 36.72 41.46 46.81 52.84 59.66 67.36
Total cost of revenue 670.47 731.93 926.00 932.45 1098.44 1278.06 1462.16 1661.82 1875.74 2121.11 2404.71 2693.61 2838.16
Gross profit 1549.29 1666.45 1826.00 2416.25 2918.58 3451.25 4046.41 4666.47 5334.13 6078.31 6940.68 7820.52 8201.68Research & development 401.53 504.42 546.00 669.74 803.40 945.86 1101.72 1265.66 1441.97 1639.88 1869.08 2102.83 2207.97
Selling, general & administrative 524.66 583.01 674.00 602.77 723.06 851.28 991.54 1139.09 1297.78 1475.90 1682.17 1892.54 1987.17
Legal contingencies 19.00 -9.49 - - - - - - - - - - -
Other operating expenses,net -8.74 1.49 0.00 1.04 1.25 1.47 1.71 1.96 2.24 2.55 2.90 3.26 3.43
Total operating expense 936.45 1079.42 1220.00 1273.55 1527.71 1798.61 2094.97 2406.72 2741.99 3118.32 3554.15 3998.63 4198.57Income (loss) from operations 612.84 587.03 606.00 1142.70 1390.86 1652.64 1951.44 2259.75 2592.14 2959.98 3386.53 3821.89 4003.12Interest income and other income, net 5.02 9.80 474.00 32.77 39.30 46.27 53.90 61.92 70.55 80.23 91.44 102.88 108.02
Interest expense and other expense,net 50.32 35.65 37.00 107.52 113.80 121.47 123.89 131.32 139.20 147.55 156.41 165.79 175.74
Cost-method investment related gain (loss), n 15.60 - - - - - - - - - - - -
Total other income (expense), net -29.70 -25.85 437.00 -74.75 -74.50 -75.20 -69.99 -69.40 -68.66 -67.33 -64.97 -62.91 -67.72
Income (loss) before income taxes 583.14 561.18 1043.00 1067.95 1316.37 1577.45 1881.45 2190.35 2523.49 2892.66 3321.57 3758.97 3935.40
Provision (benefit) for income taxes 125.75 133.09 365.00 224.27 276.44 331.26 395.11 459.97 529.93 607.46 697.53 789.38 826.43
Consolidated net income (loss) 457.39 428.09 678.00 843.68 1039.93 1246.18 1486.35 1730.38 1993.56 2285.20 2624.04 2969.59 3108.97
Shares used in computing earnings per share:
Basic 144.83 146.79 146.00 145 145 144 143 143 142 142 141 141 141
Net income per share:Basic 3.19 3.09 4.96 $5.81 $7.19 $8.65 $10.36 $12.11 $14.00 $16.10 $18.55 $21.05 $22.10
4
Illumina, Inc.Balance Sheet
In million USD
Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
ASSETSCurrent Assets:Cash & cash equivalents 327.02 144.63 248.95 302.98 433.98 711.64 636.15 768.77 734.52 1225.00 1383.26 1887.96 2638.82 3575.48 4728.73 6107.29 7728.66 9638.53 11868.28 14629.27
Short-term investments 313.05 548.89 645.34 886.59 916.22 453.97 702.22 617.45 824.21 920.00 1106.95 1327.87 1563.33 1820.92 2091.89 2383.30 2710.41 3089.22 3475.56 3649.34
Accounts receivable, net 133.27 157.75 165.60 173.89 214.98 238.95 389.46 385.53 381.32 411.00 583.82 700.33 824.52 960.37 1103.29 1256.98 1429.50 1629.29 1833.05 1924.70
Inventory 73.43 92.78 142.21 128.78 158.72 154.10 191.14 270.78 300.17 333.00 423.39 507.89 597.94 696.47 800.11 911.57 1036.68 1181.57 1329.34 1395.80
Prepaid expenses & other current assets 9.53 17.52 36.92 29.20 32.70 22.81 29.84 54.30 77.88 91.00 87.74 105.26 123.92 144.34 165.82 188.92 214.85 244.87 275.50 289.27
Total current assets 864.94 981.59 1258.40 1544.62 1787.05 1617.54 1889.60 2096.82 2318.09 2980.00 3585.16 4529.30 5748.52 7197.59 8889.83 10848.06 13120.10 15783.48 18781.73 21888.40
Property & equipment, net 89.44 117.19 129.87 143.48 166.17 202.67 265.26 342.69 713.33 931.00 993.40 1076.75 1084.45 1130.64 1173.39 1256.27 1349.50 1438.01 1544.24 1498.07
Goodwill 228.73 213.45 278.21 321.85 369.33 723.06 724.90 752.63 776.00 771.00 771.00 771.00 771.00 771.00 771.00 771.00 771.00 771.00 771.00 771.00
Intangible assets, net 47.76 43.79 70.02 106.48 130.20 331.17 314.50 273.62 242.65 175.00 197.58 223.06 251.84 284.32 321.00 362.41 409.16 461.94 521.54 588.81
Deferred tax assets, long-term portion 78.32 47.37 39.50 19.68 40.18 88.48 49.85 134.52 123.32 88.00 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16
Other assets 12.02 26.55 63.11 59.74 73.16 56.09 95.52 87.47 107.21 312.00 320.42 329.08 337.96 347.09 356.46 366.08 375.97 386.12 396.54 407.25
Total assets 1377.10 1429.94 1839.11 2195.84 2566.09 3019.01 3339.64 3687.75 4280.60 5257.00 5961.72 7023.35 8246.28 9779.15 11573.20 13654.33 16067.24 18891.07 22073.56 25208.04LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable 29.20 52.78 66.74 49.81 65.73 73.66 82.63 139.23 137.93 160.00 195.26 234.23 275.76 321.20 369.00 420.40 478.10 544.92 613.07 643.73
Accrued liabilities 80.36 98.25 156.16 187.77 201.88 219.12 335.28 396.34 342.75 432.00 544.84 653.58 769.47 896.26 1029.64 1173.07 1334.07 1520.53 1710.69 1796.22
Build-to-suit lease liability - - - - - - - - 222.73 144.00 122.00 102.00 82.00 61.00 40.00 19.00 0.00 0.00 0.00 0.00
Long-term debt, current portion 400.00 290.20 311.61 - 36.97 29.29 304.26 74.93 1.25 10.00 633.00 0.00 517.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total current liabilities 509.56 441.24 534.52 237.58 304.57 322.06 722.16 610.49 704.67 746.00 1495.11 989.81 1644.24 1278.47 1438.63 1612.47 1812.18 2065.45 2323.76 2439.95
Long-term debt - - - 807.37 805.41 839.31 986.78 1015.65 1047.81 1182.00 628.66 1346.69 856.49 1455.90 1543.25 1635.84 1733.99 1838.03 1948.32 2065.22
Other long-term liabilities 16.63 24.66 28.53 69.95 134.37 191.22 167.90 180.51 213.96 360.00 270.24 324.17 381.65 444.53 510.68 581.83 661.68 754.16 848.48 890.90
Redeemable noncontrolling interests - - - - - - - 32.55 43.94 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00
Total Liabilities 528.50 565.69 641.44 1120.63 1247.50 1485.80 1876.84 1839.19 2010.37 2508.00 2614.00 2880.67 3102.37 3398.90 3712.57 4050.14 4427.85 4877.65 5340.55 5616.06Stockholders' Equity:Common Stock & Paid-in Capital 1501.10 1639.19 1892.80 2251.57 2421.53 2564.46 2174.75 2499.36 2735.28 2835.00 2840.04 2845.07 2850.11 2850.11 2850.11 2850.11 2850.11 2850.11 2850.11 2850.11
Accumulated other comprehensive income (loss) 2.41 2.83 1.77 2.12 2.12 1.23 -1.08 0.04 -1.04 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00
Retained earnings (accumulated deficit) -332.50 -280.23 -155.34 -68.71 82.55 207.86 561.21 1022.77 1485.41 2256.00 3099.68 4139.61 5385.79 6872.14 8602.52 10596.07 12881.27 15505.31 18474.90 21583.86
Treasury stock, at cost 322.41 497.54 541.56 1109.76 1187.62 1240.35 1272.07 1673.61 2022.43 2341.00 2591.00 2841.00 3091.00 3341.00 3591.00 3841.00 4091.00 4341.00 4591.00 4841.00
Total Illumina stockholders' equity 848.60 864.25 1197.68 1075.22 1318.58 1533.20 1462.80 1848.55 2197.23 2749.00 3347.72 4142.68 5143.90 6380.25 7860.63 9604.19 11639.39 14013.42 16733.01 19591.98
Non-controlling interests - - - - - - - - 73.01 - - - - - - - - - - -
Total stockholders' equity 848.60 864.25 1197.68 1075.22 1318.58 1533.20 1462.80 1848.55 2270.24 2749.00 3347.72 4142.68 5143.90 6380.25 7860.63 9604.19 11639.39 14013.42 16733.01 19591.98Total Liability and Stockholders' Equity 1377.10 1429.94 1839.11 2195.84 2566.09 3019.01 3339.64 3687.75 4280.60 5257.00 5961.72 7023.35 8246.28 9779.15 11573.20 13654.33 16067.24 18891.07 22073.56 25208.04
5
Illumina, Inc.
Cash Flow Statement
In million USD
Fiscal Years Ending Dec. 31 2015 2016 2017
CASH FLOWS FROM OPERATING ACTIVITIES:Consolidated net income (loss) 457.39 428.09 678.00
Loss (gain) on deconsolidation of GRAIL - - -453.00
Depreciation expense 72.69 89.96 110.00
Amortization of intangible assets 53.73 50.96 46.00
Share-based compensation expense 132.59 129.07 164.00
Accretion of debt discount 38.52 29.73 30.00
Loss on extinguishment of debt 4.06 0.11 -
Incremental tax benefit related to share-based compensation -126.66 -91.33 -
Deferred income taxes 80.50 93.56 81.00
Fair value of contingent consideration -6.12 -1.16 -
Impairment of intangible assets - - 23.00
Estimated cease-use loss -2.61 - -
Cost-method investment loss (gain), net -15.60 - -
Loss (gain) on litigation settlement - -11.49 -
Other non-cash adjustments 9.55 14.76 1.00
Changes in assets and liabilities:
Accounts receivable -95.91 3.24 -26.00
Inventory -80.55 -29.69 -33.00
Prepaid expenses & other current assets -10.88 -1.20 8.00
Other assets -1.42 -6.88 -5.00
Accounts payable 46.30 -1.97 10.00
Accrued liabilities 79.79 -24.25 81.00
Accrued legal contingencies 19.00 - -
Other long-term liabilities 5.22 15.74 160.00
Unrealized gain (loss) on foreign exchange - - -
Net cash flows from operating activities 659.60 687.24 875.00
CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale securities -797.02 -894.37 -742.00
Sales & maturities of available-for-sale securities - - -
Sales of available-for-sale securities 582.53 543.25 322.00
Maturities of available-for-sale securities 294.22 139.64 321.00
Net cash paid for acquisitions -36.58 -17.84 -
Proceeds from sale of GRAIL securities - - 278.00
Deconsolidation of GRAIL cash - - -52.00
Net sales proceeds from (purchases of) strategic investments -6.05 -13.84 -29.00
Purchases of property & equipment -142.85 -259.89 -310.00
Cash paid for intangible assets -0.40 -11.49 -2.00
Net cash flows from investing activities -106.15 -514.54 -214.00
CASH FLOWS FROM FINANCING ACTIVITIES:Payments on current portion of long-term debt - - -
Payments on financing obligations -244.95 -65.90 -9.00
Payments on acquisition related contingent consideration liability -2.90 -29.20 -3.00
Proceeds from issuance of debt - 5.00 5.00
Incremental tax benefit related to share-based compensation 126.66 91.33 -
Common stock repurchases -274.32 -249.34 -251.00
Taxes paid related to net share settlement of equity awards -127.21 -99.83 -68.00
Proceeds from issuance of common stock 71.84 47.66 71.00
Proceeds from early exercise of equity awards from a subsidiary - 6.56 -
Contributions from noncontrolling interest owners 32.13 89.00 79.00
Net cash flows from financing activities -418.76 -204.71 -176.00
Effect of exchange rate changes on cash & cash equivalents -2.07 -2.24 5.00
Net increase (decrease) in cash & cash equivalents 132.62 -34.25 490.00
Cash & cash equivalents at beginning of year 636.15 768.77 735.00
Cash & cash equivalents at end of year 768.77 734.52 1225.00
6
Illumina, Inc.Cash Flow ForecastIn million USD
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
CASH FLOWS FROM OPERATING ACTIVITIES:Consolidated net income (loss) 843.68 1039.93 1246.18 1486.35 1730.38 1993.56 2285.20 2624.04 2969.59 3108.97
Adjusments to reconcile net income to net cash provided by operating activities:
Depreciation expense 139.65 149.01 161.51 162.67 169.60 176.01 188.44 202.42 215.70 231.64
Amortization expense 22.60 25.52 28.81 32.52 36.72 41.46 46.81 52.84 59.66 67.36
Changes in operating assets and liabilities:
Accounts receivable, net -172.82 -116.52 -124.18 -135.86 -142.91 -153.69 -172.52 -199.79 -203.76 -91.65
Inventory -90.39 -84.50 -90.06 -98.53 -103.64 -111.46 -125.11 -144.89 -147.77 -66.47
Deferred tax assets -6.16 0.00 139.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Prepaid expenses & other current assets 3.26 -17.51 -18.66 -20.42 -21.48 -23.10 -25.93 -30.03 -30.62 -13.77
Accounts payable 35.26 38.97 41.53 45.44 47.80 51.40 57.70 66.82 68.15 30.65
Accrued liabilities 112.84 108.74 115.89 126.79 133.37 143.43 161.00 186.45 190.16 85.53
Build-to-suit lease liability -22.00 -20.00 -20.00 -21.00 -21.00 -21.00 -19.00 0.00 0.00 0.00
Net cash flows from operating activities 865.93 1123.64 1480.67 1577.97 1828.83 2096.61 2396.59 2757.87 3121.10 3352.25
CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant & equipment 202.05 232.36 267.21 204.86 225.35 247.88 272.67 299.94 329.93 181.46
Purchase of intangible assets 45.18 51.00 57.58 65.01 73.40 82.87 93.56 105.63 119.25 134.63
Purchase of other assets 8.42 8.65 8.89 9.12 9.37 9.62 9.88 10.15 10.43 10.71
Purchase of short-term investment 186.95 220.92 235.46 257.60 270.97 291.41 327.11 378.81 386.34 173.78
Net cash flows from investing activities -442.60 -512.93 -569.14 -536.59 -579.08 -631.79 -703.22 -794.53 -845.95 -500.58
CASH FLOWS FROM FINANCING ACTIVITIES:Change in current debt 623.00 -633.00 517.00 -517.00 0.00 0.00 0.00 0.00 0.00 0.00
Change in long-term debt -553.34 718.03 -490.20 599.41 87.35 92.59 98.15 104.04 110.28 116.90
Change in other long-term liabilities -89.76 53.93 57.48 62.89 66.15 71.14 79.86 92.48 94.32 42.42
Purchase of treasury stock -250.00 -250.00 -250.00 -250.00 -250.00 -250.00 -250.00 -250.00 -250.00 -250.00
Issuance of common stock 5.04 5.04 5.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net cash flows from financing activities -265.07 -106.00 -160.68 -104.71 -96.50 -86.26 -71.99 -53.48 -45.40 -90.68
Net increase (decrease) in cash & cash equivalents 158.26 504.70 750.86 936.67 1153.25 1378.56 1621.37 1909.86 2229.75 2760.99
Cash & cash equivalents at beginning of year 1225.00 1383.26 1887.96 2638.82 3575.48 4728.73 6107.29 7728.66 9638.53 11868.28
Cash & cash equivalents at end of year 1383.26 1887.96 2638.82 3575.48 4728.73 6107.29 7728.66 9638.53 11868.28 14629.27
7
Illumina, Inc.Common Size Income Statement
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Total revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of product and service 24.85% 24.97% 28.23% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00%
gross margin % 75.15% 75.03% 71.77% 77.00% 77.00% 77.00% 77.00% 77.00% 77.00% 77.00% 77.00% 77.00% 77.00%
Depreciation expense 3.29% 3.75% 4.00% 4.17% 3.71% 3.42% 2.95% 2.68% 2.44% 2.30% 2.17% 2.05% 2.10%
Amortization of intangible assets, net 2.06% 1.79% 1.42% 0.67% 0.64% 0.61% 0.59% 0.58% 0.58% 0.57% 0.57% 0.57% 0.61%
Total cost of revenue 30.20% 30.52% 33.65% 27.85% 27.34% 27.02% 26.54% 26.26% 26.02% 25.87% 25.73% 25.62% 25.71%
Gross profit 69.80% 69.48% 66.35% 72.15% 72.66% 72.98% 73.46% 73.74% 73.98% 74.13% 74.27% 74.38% 74.29%Research & development 18.09% 21.03% 19.84% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
Selling, general & administrative 23.64% 24.31% 24.49% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
Legal contingencies 0.86% -0.40% - - - - - - - - - - -
Other operating expenses,net -0.39% 0.06% 0.00% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03%
Total operating expense 42.19% 45.01% 44.33% 38.03% 38.03% 38.03% 38.03% 38.03% 38.03% 38.03% 38.03% 38.03% 38.03%
Income (loss) from operations 27.61% 24.48% 22.02% 34.12% 34.62% 34.94% 35.43% 35.71% 35.95% 36.10% 36.24% 36.35% 36.26%
Interest income and other income, net 0.23% 0.41% 17.22% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98%
Interest expense and other expense,net 2.27% 1.49% 1.34% 3.21% 2.83% 2.57% 2.25% 2.08% 1.93% 1.80% 1.67% 1.58% 1.59%
Cost-method investment related gain (loss), net 0.70% - - - - - - - - - - - -
Total other income (expense), net -1.34% -1.08% 15.88% -2.23% -1.85% -1.59% -1.27% -1.10% -0.95% -0.82% -0.70% -0.60% -0.61%
Income (loss) before income taxes 26.27% 23.40% 37.90% 31.89% 32.77% 33.35% 34.15% 34.61% 35.00% 35.28% 35.54% 35.75% 35.65%
Provision (benefit) for income taxes 5.67% 5.55% 13.26% 6.70% 6.88% 7.00% 7.17% 7.27% 7.35% 7.41% 7.46% 7.51% 7.49%
Consolidated net income (loss) 20.61% 17.85% 24.64% 25.19% 25.89% 26.35% 26.98% 27.34% 27.65% 27.87% 28.08% 28.24% 28.16%
8
Illumina, Inc.
Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
ASSETS
Current Assets:
Cash & cash equivalents 34.63% 30.63% 44.51% 41.31% 47.00% 55.80% 64.91% 74.72% 84.71% 94.26% 103.14% 112.88% 132.51%
Short-term investments 27.82% 34.37% 33.43% 33.06% 33.06% 33.06% 33.06% 33.06% 33.06% 33.06% 33.06% 33.06% 33.06%
Accounts receivable, net 17.37% 15.90% 14.93% 17.43% 17.43% 17.43% 17.43% 17.43% 17.43% 17.43% 17.43% 17.43% 17.43%
Inventory 12.20% 12.52% 12.10% 12.64% 12.64% 12.64% 12.64% 12.64% 12.64% 12.64% 12.64% 12.64% 12.64%
Prepaid expenses & other current assets 2.45% 3.25% 3.31% 2.62% 2.62% 2.62% 2.62% 2.62% 2.62% 2.62% 2.62% 2.62% 2.62%
Total current assets 94.46% 96.65% 108.28% 107.06% 112.75% 121.55% 130.66% 140.48% 150.46% 160.01% 168.89% 178.63% 198.27%
Property & equipment, net 15.44% 29.74% 33.83% 29.67% 26.80% 22.93% 20.53% 18.54% 17.42% 16.46% 15.39% 14.69% 13.57%
Goodwill 33.91% 32.36% 28.02% 23.02% 19.19% 16.30% 14.00% 12.18% 10.69% 9.40% 8.25% 7.33% 6.98%
Intangible assets, net 12.33% 10.12% 6.36% 5.90% 5.55% 5.33% 5.16% 5.07% 5.03% 4.99% 4.94% 4.96% 5.33%
Deferred tax assets, long-term portion 6.06% 5.14% 3.20% 2.81% 2.34% 1.99% 1.71% 1.49% 1.31% 1.15% 1.01% 0.90% 0.85%
Other assets 3.94% 4.47% 11.34% 9.57% 8.19% 7.15% 6.30% 5.63% 5.08% 4.59% 4.13% 3.77% 3.69%
Total assets 166.13% 178.48% 191.02% 178.03% 174.84% 174.37% 177.53% 182.88% 189.38% 195.96% 202.14% 209.94% 228.34%LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 6.27% 5.75% 5.81% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83%
Accrued liabilities 17.86% 14.29% 15.70% 16.27% 16.27% 16.27% 16.27% 16.27% 16.27% 16.27% 16.27% 16.27% 16.27%
Build-to-suit lease liability - 9.29% 5.23% 3.64% 2.54% 1.73% 1.11% 0.63% 0.26% 0.00% 0.00% 0.00% 0.00%
Long-term debt, current portion 3.38% 0.05% 0.36% 18.90% 0.00% 10.93% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total current liabilities 27.50% 29.38% 27.11% 44.65% 24.64% 34.77% 23.21% 22.73% 22.36% 22.10% 22.10% 22.10% 22.10%
Long-term debt 45.75% 43.69% 42.95% 18.77% 33.52% 18.11% 26.43% 24.39% 22.69% 21.15% 19.67% 18.53% 18.71%
Other long-term liabilities 8.13% 8.92% 13.08% 8.07% 8.07% 8.07% 8.07% 8.07% 8.07% 8.07% 8.07% 8.07% 8.07%
Redeemable noncontrolling interests 1.47% 1.83% 7.99% 6.57% 5.48% 4.65% 3.99% 3.48% 3.05% 2.68% 2.35% 2.09% 1.99%
Total Liabilities 82.86% 83.82% 91.13% 78.06% 71.71% 65.60% 61.70% 58.67% 56.18% 54.00% 52.19% 50.79% 50.87%Stockholders' Equity:
Common Stock & Paid-in Capital 112.60% 114.05% 103.02% 84.81% 70.83% 60.26% 51.74% 45.04% 39.53% 34.76% 30.50% 27.11% 25.82%
Accumulated other comprehensive income (loss) 0.00% -0.04% -0.04% -0.03% -0.02% -0.02% -0.02% -0.02% -0.01% -0.01% -0.01% -0.01% -0.01%
Retained earnings (accumulated deficit) 46.08% 61.93% 81.98% 92.56% 103.05% 113.88% 124.75% 135.94% 146.97% 157.10% 165.91% 175.71% 195.51%
Treasury stock, at cost 75.40% 84.33% 85.07% 77.37% 70.72% 65.36% 60.65% 56.75% 53.27% 49.89% 46.45% 43.67% 43.85%
Total Illumina stockholders' equity 83.28% 91.61% 99.89% 99.97% 103.13% 108.77% 115.82% 124.21% 133.21% 141.95% 149.95% 159.15% 177.47%
Non-controlling interests - 3.04% - - - - - - - - - - -
Total stockholders' equity 83.28% 94.66% 99.89% 99.97% 103.13% 108.77% 115.82% 124.21% 133.21% 141.95% 149.95% 159.15% 177.47%Total Liabilities and Stockholders' Equity 166.13% 178.48% 191.02% 178.03% 174.84% 174.37% 177.53% 182.88% 189.38% 195.96% 202.14% 209.94% 228.34%
9
Illumina, Inc.Weighted Average Cost of Capital (WACC) Estimation
Cost of EquityBeta(5Yr Weekly) 1.197
Risk-Free Rate 3.15%
Market Risk Premium 5.32%
Cost of Equity 9.52%
Cost of DebtPre-Tax Cost of Debt 9.02%
Tax Rate 21.00%
After Tax Cost of Debt 7.13%
Weights% Equity 99.1%
% Debt 0.94%
Market Value of EquityShare Price $310.39
Share Outstanding 147,000,000
Market Value of Equity 45,627,330,000 $
Market Value Of DebtMarket Valueof Debt 1,348,000.00 $
PV Operating Leases 429,509,086 $
Market Value Of Debt 430,857,086 $
WACC 9.50%
10
Illumina, Inc.
Key Management Ratios
Fiscal Years Ending 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Liquidity Ratios
Current Ratio (Current Assets / Current Liabilities) 1.70 2.22 2.35 6.50 5.87 5.02 2.62 3.43 3.29 3.99 2.40 4.58 3.50 5.63 6.18 6.73 7.24 7.64 8.08 8.97
Quick Ratio ((Cash Equivalents + Accounts Receivable) / Current Liabilities) 0.90 0.69 0.78 2.01 2.13 2.95 1.42 1.89 1.58 2.19 1.32 2.61 2.11 3.55 4.05 4.57 5.05 5.46 5.90 6.78
Cash Ratio (Cash & Cash Equivalents / Current Liabilities) 0.64 0.33 0.47 1.28 1.42 2.21 0.88 1.26 1.04 1.64 0.93 1.91 1.60 2.80 3.29 3.79 4.26 4.67 5.11 6.00
Activity or Asset-Management Ratios
Total Assets Turnover (Sales / Total Asses) 0.42 0.47 0.49 0.48 0.45 0.47 0.56 0.60 0.56 0.52 0.56 0.57 0.57 0.56 0.55 0.53 0.51 0.49 0.48 0.44
Fixed Assets Turnover (Sales / Fixed Assets) 6.41 5.69 6.95 7.36 6.91 7.01 7.02 6.48 3.36 2.96 3.37 3.73 4.36 4.87 5.39 5.74 6.08 6.50 6.81 7.37
Inventory Turnover (Cost-of Good Sold / Average Inventory) 2.18 2.35 2.06 2.17 2.72 2.68 2.39 2.10 2.45 2.04 1.98 1.97 1.96 1.95 1.94 1.94 1.94 1.93 1.86
Financial Leverage Ratios
Debt-to-Equity (Total Liabilities / Stockholder's Equity) 0.62 0.65 0.54 1.04 0.95 0.97 1.28 0.99 0.89 0.91 0.78 0.70 0.60 0.53 0.47 0.42 0.38 0.35 0.32 0.29
Equity Ratio ( Total Equity / Total Assets) 0.62 0.60 0.65 0.49 0.51 0.51 0.44 0.50 0.53 0.52 0.56 0.59 0.62 0.65 0.68 0.70 0.72 0.74 0.76 0.78
Debt Ratio ( Total Debt / Total Assets) 0.29 0.20 0.17 0.37 0.33 0.29 0.39 0.30 0.25 0.23 0.21 0.19 0.17 0.15 0.13 0.12 0.11 0.10 0.09 0.08
Profitability Ratios
Gross Margin (Gross Profit / Sales) 62.31% 68.08% 66.63% 67.18% 67.35% 64.16% 69.72% 69.80% 69.48% 66.35% 72.15% 72.66% 72.98% 73.46% 73.74% 73.98% 74.13% 74.27% 74.38% 74.29%
Operating Margin (Operating income / Sales) 14.04% 18.85% 23.45% 18.90% 17.48% 9.44% 27.65% 27.61% 24.48% 22.02% 34.12% 34.62% 34.94% 35.43% 35.71% 35.95% 36.10% 36.24% 36.35% 36.26%
Pretax Margin (Pretax income / Sales) 15.86% 17.13% 20.54% 12.60% 19.38% 11.21% 24.11% 26.27% 23.40% 37.90% 31.89% 32.77% 33.35% 34.15% 34.61% 35.00% 35.28% 35.54% 35.75% 35.65%
Net Profit Margin (Net income / Sales) 8.81% 10.85% 13.83% 8.21% 13.17% 8.82% 18.98% 20.61% 17.85% 24.64% 25.19% 25.89% 26.35% 26.98% 27.34% 27.65% 27.87% 28.08% 28.24% 28.16%
Return on Assets (Net Income / Average Total Assets) 47.48% 55.23% 52.32% 48.24% 50.89% 58.55% 63.17% 60.20% 57.71% 59.70% 61.87% 61.94% 61.12% 59.27% 57.16% 55.17% 53.47% 51.33% 46.70%
Return on Equity ( Net income / Stockholder's Equity) 5.95% 8.36% 10.43% 8.06% 11.47% 8.17% 24.16% 24.74% 18.86% 24.66% 25.20% 25.10% 24.23% 23.30% 22.01% 20.76% 19.63% 18.73% 17.75% 15.87%
Payout Policy Ratios
Earnings Per Share (Net income / Average number of common shares outstanding 0.43 0.59 1.01 0.70 1.23 1.00 2.61 3.19 3.09 4.96 5.81 7.19 8.65 10.36 12.11 14.00 16.10 18.55 21.05 22.10
11
Illumina, Inc.Value Driver EstimationIn million USD
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
NOPLAT ComputationEBITA:Net Sales 2219.76 2398.37 2752.00 3348.70 4017.02 4729.31 5508.58 6328.29 7209.87 8199.42 9345.39 10514.13 11039.84
-Cost of Products Sold 670.47 731.93 926.00 932.45 1098.44 1278.06 1462.16 1661.82 1875.74 2121.11 2404.71 2693.61 2838.16
-Operating Expenses 936.45 1079.42 1220.00 1273.55 1527.71 1798.61 2094.97 2406.72 2741.99 3118.32 3554.15 3998.63 4198.57
+Implied Interest on Operating Leases 31.76 32.33 38.74 39.52 40.31 41.11 41.94 42.77 43.63 44.50 45.39 46.30 47.23
EBITA 644.60 619.36 644.74 1182.22 1431.17 1693.75 1993.38 2302.53 2635.77 3004.48 3431.92 3868.19 4050.34
Less: Adjusted Taxes:Provision for Income Taxes 125.75 133.09 365.00 224.27 276.44 331.26 395.11 459.97 529.93 607.46 697.53 789.38 826.43
+Tax Shield on Implied Lease Interest 6.67 6.79 8.14 8.30 8.46 8.63 8.81 8.98 9.16 9.35 9.53 9.72 9.92
+Tax Shield on Interest Expense 10.57 7.49 7.77 22.58 23.90 25.51 26.02 27.58 29.23 30.99 32.85 34.82 36.91
-Tax on Interest Income 1.06 2.06 99.54 6.88 8.25 9.72 11.32 13.00 14.81 16.85 19.20 21.60 22.68
-Tax on Cost-method investment related
gain (loss), net 3.28 - - - - - - - - - - - -
-Tax on Non-operating Income 3.28 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Adjusted Taxes 135.38 145.31 281.37 248.27 300.55 355.69 418.61 483.53 553.51 630.94 720.70 812.32 850.57
Plus:Change in Deferred Tax(DT)Current Year DT Asset - - - - - - - - - - - - -
+DT Long-Term Assets 134.52 123.32 88.00 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16
Net DT Assets 134.52 123.32 88.00 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16 94.16
Net Change in DT(Current Yr - Previous Yr) 43.88 -11.20 -35.32 6.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
NOPLAT: EBITA - Adjusted Taxes + Chan 553.10 462.86 328.06 940.11 1130.62 1338.07 1574.77 1819.00 2082.26 2373.54 2711.22 3055.87 3199.77
YoY% 40.03% -16.32% -29.12% 186.57% 20.26% 18.35% 17.69% 15.51% 14.47% 13.99% 14.23% 12.71% 4.71%
Invested Capital ComputationOperating Current Assets:Normal Cash 15.38 14.69 24.50 27.67 37.76 52.78 71.51 94.57 122.15 154.57 192.77 237.37 292.59
Accounts Receivable, Net 385.53 381.32 411.00 583.82 700.33 824.52 960.37 1103.29 1256.98 1429.50 1629.29 1833.05 1924.70
Inventory 270.78 300.17 333.00 423.39 507.89 597.94 696.47 800.11 911.57 1036.68 1181.57 1329.34 1395.80
Prepaid expenses & other current assets 54.30 77.88 91.00 87.74 105.26 123.92 144.34 165.82 188.92 214.85 244.87 275.50 289.27
Operating Current Assets 725.98 774.06 859.50 1122.62 1351.24 1599.16 1872.69 2163.79 2479.61 2835.60 3248.50 3675.25 3902.37
Operating Current Liabilities:Accunts Payable 139.23 137.93 160.00 195.26 234.23 275.76 321.20 369.00 420.40 478.10 544.92 613.07 643.73
Accrued Expenses 396.34 342.75 432.00 544.84 653.58 769.47 896.26 1029.64 1173.07 1334.07 1520.53 1710.69 1796.22
Build-to-suit lease liability - 222.73 144.00 122.00 102.00 82.00 61.00 40.00 19.00 0.00 0.00 0.00 0.00
Operating Current Liabilities 535.57 703.42 736.00 862.11 989.81 1127.24 1278.47 1438.63 1612.47 1812.18 2065.45 2323.76 2439.95
Net Operating Working Capital 190.41 70.64 123.50 260.51 361.42 471.92 594.23 725.15 867.14 1023.42 1183.05 1351.49 1462.42
Plus: Net PPE 342.69 713.33 931.00 993.40 1076.75 1084.45 1130.64 1173.39 1256.27 1349.50 1438.01 1544.24 1498.07
Plus: PV of Operating Leases 352.14 358.39 429.51 438.10 446.86 455.80 464.91 474.21 483.70 493.37 503.24 513.30 523.57
Plus: Non-goodwill intangibles 273.62 242.65 175.00 197.58 223.06 251.84 284.32 321.00 362.41 409.16 461.94 521.54 588.81
Plus: Other Operating Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Less: Other Operating Liabilities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Invested Capital : 1158.87 1385.02 1659.01 1889.58 2108.09 2264.00 2474.11 2693.76 2969.51 3275.46 3586.25 3930.57 4072.87
Change in Invested Capital 57.88 226.15 273.99 230.57 218.51 155.91 210.11 219.65 275.75 305.94 310.79 344.33 142.30
Value Drivers:ROIC 50.24% 39.94% 23.69% 56.67% 59.83% 63.47% 69.56% 73.52% 77.30% 79.93% 82.77% 85.21% 81.41%
EP 299.88 196.32 9.50 558.54 696.02 853.21 1054.05 1249.95 1462.70 1690.55 1957.87 2231.03 2295.74
FCF 495.22 236.70 54.07 709.54 912.12 1182.16 1364.66 1599.34 1806.51 2067.60 2400.43 2711.54 3057.47
12
Illumina, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
CV Growth 5.00%
CV ROIC 81.41%
WACC 9.50%
Cost of Equity 9.52%
DCF Model (In millions of USD)Fiscal Years Ending Dec. 31 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVNOPLAT 328 940 1,131 1,338 1,575 1,819 2,082 2,374 2,711 3,056 3,200
(-) CapEx (231) (219) (156) (210) (220) (276) (306) (311) (344) (142)
Unlevered FCF & CV(2027) 710 912 1,182 1,365 1,599 1,807 2,068 2,400 2,712 66,803
Present Value of FCF & CV 648 761 901 949 1,016 1,048 1,096 1,162 1,199 29,527
Value of Opearting Asset 38,306
(+)Excess Cash 1,201
(+)ST & LT Investments 1106.95
(-)PV Operating Leases (430)
(-)ESOP (86)
(-)MV of debt (431)
Value Of Equity 39,667
Shareing Outstanding 146
Intrinsic Value of Equity 271.69 $
EP Model (In millions of USD)2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV
NOPLAT 328 940 1,131 1,338 1,575 1,819 2,082 2,374 2,711 3,056 3,200
Beg. IC 1,659 1,890 2,108 2,264 2,474 2,694 2,970 3,275 3,586 3,931
ROIC 57% 60% 63% 70% 74% 77% 80% 83% 85% 81%
WACC 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%
EP 783 951 1138 1360 1584 1826 2092 2400 2715 2827
CV CV 62,873
EP to Discount 783 951 1,138 1,360 1,584 1,826 2,092 2,400 2,715 62,873
Present Value of EP 715 793 867 946 1006 1060 1108 1162 1200 27790
Present Value of EP & CV 36647
Beg. IC in 2017 1659
Value of Operating Assets 38306(+)Excess Cash 1,201
(+)ST & LT Investments 1,107
(-)PV Operating Leases (430)
(-)ESOP (86)
(-)MV of debt (431)
Value Of Equity 39,667
Shareing Outstanding 146
Intrinsic Value of Equity 271.69 $
For Discounting:
Number of Periods 1 2 3 4 5 6 7 8 9 9
Model Date 11/13/2018
Next FYE 12/31/2018
Last FYE 12/31/2017
Days in FY 365
Days to FYE 317
Elapsed Fraction 0.868
Adjusted Target Price 294.02 $
Key Inputs
13
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
EPS 5.81 $ 7.19 $ 8.65 $ 10.36 $ 12.11 $ 14.00 $ 16.10 $ 18.55 $ 21.05 $ 22.10 $
Key Assumptions CV Growth 5.00%
CV ROE 15.87%
Cost of Equity 9.52%
Future Cash Flows P/E Multiple (CV Year) 15.1594866
EPS (CV Year) 22.10
Future Stock Price 335.00
Future Cash Flows 335.00
Discounted Cash Flows 147.80$
Intrinsic Value 147.80 $
For Discounting:
Number of Periods 1 2 3 4 5 6 7 8 9 9
Model Date 11/13/2018
Next FYE 12/30/2018
Last FYE 12/31/2017
Days in FY 365
Days to FYE 317
Elapsed Fraction 0.868Adjusted Target Price $ 159.94
14
Illumina, Inc.Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19
TMO Thermo Fisher Scientific Inc. $236.34 $11.04 $12.25 21.41 19.29 11.4 1.88 1.69
PKI PerkinElmer Inc. $82.07 $3.61 $4.05 22.73 20.26 15.3 1.49 1.32
A Agilegent Technologies Inc. $64.50 $2.72 $2.98 23.71 21.64 10.7 2.22 2.02
BRKR Bruker Corp $30.61 $1.27 $1.45 24.10 21.11 10.6 2.27 1.99
TECH Bio-Techne Corp. $163.67 $4.55 $5.23 35.97 31.29 9.2 3.91 3.40
PACB Pacific Biosciences $7.65 ($0.67) ($0.47) (11.42) (16.28) 10.0 (1.14) (1.63)
300676-CN BGI $8.71 $1.10 $1.38 7.92 6.31 10.0 0.79 0.63
Average 25.59 14.81 1.63 1.35
ILMN illumina $310.39 $5.81 $7.19 53.5 43.2 10.0 5.3 4.3
Implied Relative Value: P/E (EPS18) $ 148.56 P/E (EPS19) 106.43 $ PEG (EPS18) 94.68 $ PEG (EPS19) 96.90 $
15
Operating Operating Operating
Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 246.282887543892 Leases
2018 55.00 2017 42.76 2016 39.40
2019 60.00 2018 45.21 2017 37.91
2020 58.00 2019 46.77 2018 39.85
2021 57.00 2020 46.17 2019 43.03
2022 54.00 2021 45.42 2020 43.63
Thereafter 468.00 Thereafter 435.61 Thereafter 488.13
Total Minimum Payments 752 Total Minimum Payments 661.931 Total Minimum Payments 691.939
Less: Interest 322 Less: Interest 304 Less: Interest 340
PV of Minimum Payments 430 PV of Minimum Payments 358 PV of Minimum Payments 352
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 9.02% Pre-Tax Cost of Debt 9.02% Pre-Tax Cost of Debt 9.02%
Number Years Implied by Year 6 Payment 8.2 Number Years Implied by Year 6 Payment 9.4 Number Years Implied by Year 6 Payment 11.2
Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 55 50.4 1 42.759 39.2 1 39.397 36.1
2 55 46.3 2 42.759 36.0 2 37.909 31.9
3 60 46.3 3 45.214 34.9 3 39.853 30.8
4 58 41.1 4 46.767 33.1 4 43.027 30.5
5 57 37.0 5 46.166 30.0 5 43.626 28.3
6 & beyond 57 208.4 6 & beyond 46.166 185.2 6 & beyond 43.626 194.6
PV of Minimum Payments 429.5 PV of Minimum Payments 358.4 PV of Minimum Payments 352.1
Present Value of Operating Lease Obligations (2015)Present Value of Operating Lease Obligations (2016)Present Value of Operating Lease Obligations (2017)
16
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 322,000
Average Time to Maturity (years): 3.00
Expected Annual Number of Options Exercised: 107,333
Current Average Strike Price: 46.93 $
Cost of Equity: 9.00%
Current Stock Price: $310.39
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Increase in Shares Outstanding: 107,333 107,333 107,333
Average Strike Price: 46.93 $ 46.93 $ 46.93 $
Increase in Common Stock Account: 5,037,153 5,037,153 5,037,153
Change in Treasury Stock 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000 250,000,000
Expected Price of Repurchased Shares: 310.39 $ 338.33 $ 368.77 $ 401.96 $ 438.14 $ 477.57 $ 520.56 $ 567.41 $ 618.47 $ 674.13 $
Number of Shares Repurchased: 805,438 738,934 677,921 621,946 570,593 523,480 480,257 440,602 404,222 370,846
Shares Outstanding (beginning of the year) 146,000,000 145,301,895 144,670,294 144,099,706 143,477,760 142,907,167 142,383,688 141,903,431 141,462,829 141,058,606
Plus: Shares Issued Through ESOP 107,333 107,333 107,333 0 0 0 0 0 0 0
Less: Shares Repurchased in Treasury 805,438 738,934 677,921 621,946 570,593 523,480 480,257 440,602 404,222 370,846
Shares Outstanding (end of the year) 145,301,895 144,670,294 144,099,706 143,477,760 142,907,167 142,383,688 141,903,431 141,462,829 141,058,606 140,687,760
17
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol ILMN
Current Stock Price $310.39
Risk Free Rate 3.15%
Current Dividend Yield 0.00%
Annualized St. Dev. of Stock Returns 29.89%
Average Average B-S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 322,000 46.93 3.00 267.69 $ 86,197,032 $
Total 322,000 46.93 $ 3.00 267.69 $ 86,197,032 $
