Opko Health, Inc. (NASDAQ:OPK) shares are down more than -45.91% this year and recently increased 1.82% or $0.09 to settle at $5.03. Illumina, Inc. (NASDAQ:ILMN), on the other hand, is up 67.58% year to date as of 12/21/2017. It currently trades at $214.57 and has returned 1.76% during the past week.
Opko Health, Inc. (NASDAQ:OPK) and Illumina, Inc. (NASDAQ:ILMN) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect OPK to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, ILMN is expected to grow at a 14.44% annual rate. All else equal, ILMN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 45.21% for Illumina, Inc. (ILMN). OPK’s ROI is -0.80% while ILMN has a ROI of 14.00%. The interpretation is that ILMN’s business generates a higher return on investment than OPK’s.
If there’s one thing investors care more about than earnings, it’s cash flow. OPK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, ILMN’s free cash flow per share was +1.03. On a percent-of-sales basis, OPK’s free cash flow was -4.13% while ILMN converted 6.27% of its revenues into cash flow. This means that, for a given level of sales, ILMN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. OPK has a current ratio of 1.70 compared to 4.20 for ILMN. This means that ILMN can more easily cover its most immediate liabilities over the next twelve months. OPK’s debt-to-equity ratio is 0.07 versus a D/E of 0.41 for ILMN. ILMN is therefore the more solvent of the two companies, and has lower financial risk.
OPK trades at a P/B of 1.35, and a P/S of 2.38, compared to a forward P/E of 47.96, a P/B of 10.98, and a P/S of 12.08 for ILMN. OPK is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. OPK is currently priced at a -60.55% to its one-year price target of 12.75. Comparatively, ILMN is -2.94% relative to its price target of 221.07. This suggests that OPK is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for OPK and 2.10 for ILMN, which implies that analysts are more bullish on the outlook for ILMN.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. OPK has a beta of 1.83 and ILMN’s beta is 0.81. ILMN’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.OPK has a short ratio of 13.05 compared to a short interest of 3.82 for ILMN. This implies that the market is currently less bearish on the outlook for ILMN.
Illumina, Inc. (NASDAQ:ILMN) beats Opko Health, Inc. (NASDAQ:OPK) on a total of 8 of the 14 factors compared between the two stocks. ILMN has lower financial risk, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, OPK is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ILMN has better sentiment signals based on short interest.