OSUR - OraSure Technologies: Spikes On Strong Q2 Results And Guidance

2023-08-06 21:57:00 ET

Summary

• OraSure Technologies' shares surged 32.3% after exceeding analysts' forecasts and providing bullish guidance for Q3.
• Revenue for the quarter increased by 6.5%, driven by COVID-19 diagnostic products, but the market expected a major decline in sales.
• The firm's overall situation is improving, but investors may not be wrong to take a wait-and-see approach.

It's rare that you see shares of a publicly traded company shoot up over 30% in a single day. Usually, this kind of move is only possible in mergers and acquisitions sort of scenario. However, every so often, reporting strong financial results and better than expected guidance can help the company in question achieve this upside. Such was the case involving OraSure Technologies ( OSUR ), a diagnostic healthcare technology business that's focused on producing diagnostic tests for everything from HIV, to Hepatitis C, to COVID-19, and more, which I last covered in 2022. Shares of the company spiked on August 4th, closing up 32.3% after management announced financial results that exceeded analysts’ forecasts and guidance for the third quarter of the year that is significantly higher than what the market anticipated. While this is exciting and the company enjoys a tremendous amount of cash on hand with no debt that it must allocate the cash toward, the firm is not yet a compelling prospect for value-oriented investors. Because of this, I decided to keep the business rated a ‘hold’ for now.

Solid results and bullish expectations

On August 4th, shares of OraSure Technologies spiked 32.3% after management reported financial results covering the second quarter of the company's 2023 fiscal year. In many respects, results were not exactly exciting enough to normally justify this kind of upside. Rather, it's what results were relative to forecasts that had the market ginned up. Revenue for the quarter, for instance, came in at $85.4 million. That represents an increase of only 6.5% compared to the $80.2 million the company reported one year earlier. Even though this was not a significant move higher, it did exceed analysts’ forecasts by $21.6 million.

To understand why the market was anticipating such a significant move lower when it comes to revenue, we need to dig into the company's business model and what drives sales. During the second quarter, $47.5 million, or 55.6%, of the company's revenue came from diagnostic products dedicated toward COVID-19. The primary driver behind these sales is what management calls its InteliSwab tests that it sells through government contracts.

The general conclusion from the investment community is that, while COVID-19 diagnostic tests proved beneficial for the company in recent years, the days of strong revenue associated with them are gone. The fact of the matter is that COVID-19 is quickly becoming a distant memory. In the most recent week for which data is available , the US CDC counted only 8,035 hospital admissions nationwide for the illness. Less than 20,000 new cases are being diagnosed every day. In fact, only 2 of the 3,221 counties in the US currently are seeing new hospital admissions rates classified as being ‘high’. Another 17 are in the medium category, with the rest in the low category.

The strong sales are not the only thing to be optimistic about for the business. The company did post sales growth elsewhere. Its other diagnostic offerings reported 41% sales growth from $14 million to $19.8 million. In addition, it reported a roughly 12% increase in molecular services revenue from $1.2 million to $1.4 million. In fact, the only part of the company that hurt significantly involved its molecular products. Sales there plummeted 26% from $17.6 million to $13.1 million. But this decline was largely the result of macroeconomic issues, combined with one of the largest customers that the company has scaling down their purchases following a business reorganization that occurred in the second half of 2022.

On the bottom line, management reported a loss per share of $0.07. This compares favorably to the $0.26 per share loss that analysts had forecasted. This brought the company’s net loss down from $18.6 million last year when the loss per share was identical to what analysts thought it would be this year, to only $4.8 million. Other profitability metrics also showed some really great signs of improvement. Operating income went from negative $9.7 million to positive $57.3 million. If we adjust for changes in working capital, we would get an increase from negative $1.3 million to positive $5.9 million. And finally, EBITDA for the business went from negative $8.7 million to positive $3 million.

In addition to benefiting from growth in revenue, the company is also benefiting from some cost cutting initiatives. They said that they are currently on track to achieve annualized cost savings of $15 million or more by the end of this year. Frankly, that number looks like it's going to be greater than $15 million. I say this because, if you look at the chart above, you can see financial results covering the entire first half of 2023 compared to the same time last year. Revenue continues to be higher than it was last year while bottom line results are significantly better on a year over year basis.

Exceeding forecasts was only one reason why shares of the company performed so well. The second reason seems to relate to guidance for the third quarter. Another big reason involves guidance that management provided for the third quarter of this year. The current expectation by analysts is for the company to generate revenue of between $72 million and $77 million. This would represent a decline from the $116.5 million reported in the third quarter of 2022. However, analysts were only forecasting sales of $48.9 million.

Core revenue, which excludes sales associated with InteliSwab, should come in between $37 million and $39 million. That would leave between $35 million and $38 million to come from InteliSwab. Management chalked this rosy guidance up to government contracts that the company has that should bring in $70 million worth of sales in the second half of this year that will ultimately stem from its COVID-19 diagnostic products.

There are some other positive things going on for the company at this time. For instance, the business has no debt on its books. It also boasts $185.9 million in cash and cash equivalents. And with the total enterprise at the moment generating positive cash flow, it's unlikely that its cash flow picture will deteriorate in the next quarter. Furthermore, management said that by the end of the 2022 fiscal year, the business should reach the breakeven point when it comes to operating cash flow for its core products. In order to become a viable long-term prospect, that is precisely what the company needs to achieve.

Takeaway

Normally when I analyze companies, I like to have a section in my article devoted to analyzing the business in question. However, financial performance right now is incredibly volatile and there is no way to know what the rest of this year might look like. Even third quarter guidance provided by management does not discuss profitability. Add on top of this the fact that the company is using a temporary revenue source in the form of its COVID-19 diagnostic products as a bridge to achieve cash flow breakeven, with that bridge likely to collapse sometime early to mid next year, and there's too much uncertainty to provide any reliable estimate of value. It is because of this that I have decided to keep the company rated a ‘hold’ right now. But in the event that management can come through on its goal for next year, the company might eventually be worthy of an upgrade.

For further details see: