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Is Illumina Inc. a Buffett Stock?

ILMN Revenue (TTM) Chart
ILMN Revenue (TTM) Chart

ILMN Revenue (TTM) data by YCharts .

While the company has been solidly profitable over the last five years and should continue that trend into the future, it is not clear to me that Buffett would be willing to overlook Illumina's profit dip in 2008.

3. Strong return on equity, with little or no debt


Buffett loves to buy companies that can generate high returns on capital without the need to carry a lot of debt. Here's how Illumina looks using both of these metrics over the previous five years:

ILMN Return on Equity (TTM) data by YCharts .

Illumina's return on equity has soared recently as its business has started to scale , but the company has taken on more than a billion dollars in long-term debt to get there. Thankfully, Illumina's highly profitable business model allows it to easily cover its interest expense, and it holds more than $1.4 billion in cash on its balance sheet, giving it a net cash position. My guess is that Buffett would be willing to give the company a green light here.

4. Management in place


While Illumina's current CEO Francis deSouza only took over a few months ago, he certainly seems like the right man for the job. He joined Illumina in 2013 as President, where he oversaw product development. Prior to joining Illumina he also spent years as an executive in the tech industry, which included a time period where he co-founded and lead a company that was ultimately acquired by Symantec .

In addition, Illumina's former CEO Jay Flatley still plays an important role in shaping the company's future. Flatley led the company from 1999 until deSouza took over in 2016, during which time the company's revenue grew by 64% annually. He currently serves as Executive Chairman of the Board, and he also chairs two of Illumina's exciting subsidiaries , Helix and Grail.

Shareholders look like they are in good hands with these two leaders at the helm, so Illumina passes this test.

5. A simple business


Buffett is famous for avoiding businesses that he doesn't understand, which is why he primarily invests in companies with simple business models like candy makers, newspapers, insurers, and home builders.

As a leading provider of genomic testing equipment, it is hard to call Illumina's business "simple". In essence, the company makes its money by selling its expensive gene sequencing machines to researchers around the world. Illumina's customers also need to regularly purchase consumables products and services from the company in order to run their tests, providing the company with a predictable stream of recurring revenue.

Image source: Illumina

While there are plenty of reasons to believe that the demand for genomic sequencing will continue to grow in the years ahead, my hunch is that Buffett would have a hard time understanding how this company is going to be able to win over the long term. After all, Pacific Biosciences of California (NASDAQ: PACB) now looks like a more formidable competitor and the market is rapidly evolving. It is not hard to image that a technological advancement could eventually come along and disrupt this entire industry, which is why it is so hard to identify the winners ahead of time. That fact makes me think that Buffett would put this company in his "too hard" pile.

Is Illumina on Buffett's buy list?

By my math, Illumina scores a three out of a possible five on Buffett's checklist. Since he would have to risk tens of billions of dollars to buy the company outright, I have a hard time believing that Illumina would ever make it on his shopping list.

Of course, just because Illumina might not appeal to Warren Buffett doesn't mean that it isn't worth owning. After all, Illumina remains the leader in its industry, and management believes that the genomic testing market could eventually exceed $20 billion in annual sales. That number could go far higher if Grail or Helix ultimately pay off, too. If Illumina can successfully execute against that opportunity then buying shares at today's discounted price could be a profit-friendly move.

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Brian Feroldi has no position in any stocks mentioned.Like this article? Follow him on Twitter where he goes by the handle@Longtermmindset or connect with him onLinkedIn to see more articles like this.

The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Illumina. The Motley Fool recommends Pacific Biosciences of California. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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