FXH - QuidelOrtho: Continuing Its Upward Ascent

• QuidelOrtho combines Quidel & Ortho Clinical Diagnostics.
• Significant synergies are expected to come off the partnership as well as meaningful cross-selling opportunities.
• The company's valuation, balance sheet, technicals, and profitability profile all lead to a rising share price here.

Intro

In terms of recent share-price action, we like what we see on the technical chart of QuidelOrtho Corporation ( QDEL ) (Diagnostic Testing Player) for a number of reasons. For one, after a sluggish start to the year when shares traded well below $100 a share, QuidelOrtho has managed to stop its previous pattern of sustained lower lows and maintain support levels thus far this year. Furthermore, we now have bullish divergences appearing in both the MACD & RSI technical indicators, which means those $90 lows which the stock tested on multiple occasions this year may very well be behind us. The next significant resistance level for shares of QuidelOrtho Corporation would be to take out its 200-day moving average of roughly $117 a share before we could confirm this new bull market in QuidelOrtho in earnest.

The newly formed entity "QuidelOrtho" is just off the back of completing the merger between Quidel and Ortho Clinical Diagnostics. Much of the newly constructed management team's focus will be to ensure the successful integration of the two businesses. Irrespective of the sales and cost synergies that are expected to come off the merger, as well as the merger's successful refinancing which lowers interest expense by a considerable margin, QuidelOrtho has some strong tailwinds going for it, as we see in the points below.

Cross-Selling Opportunities

Many times in a merger of two companies operating in the same space, economies of scale as well as above mentioned costs and sales synergies gives the numbers at least a boost over the first few years. However, when we study most clearly what both parties bring to the table, it is evident that there is not a lot of overlapping of products in the prominent U.S. market. This means cross-selling opportunities will be significant, to say the least. In the Hospital space, for example, we see that there is just over 50% overlap in respective revenues, only 5% in the physician's office, and 26% in the labs.

Covid Tailwind

Furthermore, with a market cap of just over $7 billion, QuidelOrtho's sales look very cheap when you look at the company's present top-line numbers. In the first quarter of this fiscal year, for example, the point-of-care testing segment once more drove sales-forward aggressively. Point of care reported $943 million for the quarter, which resulted in a bumper quarter of $1.5 billion in revenues in total. Now, the pandemic obviously contributed to this number significantly and management does foresee a tapering off of this segment, but new variants continue to gain ground in the West which is resulting in growing Covid cases once more. Suffice it to say, QuidelOrtho is prepared for testing levels to remain elevated for some time to come.

Large Growing Markets

In saying this, QuidelOrtho operates in large markets which continue to grow and spit out large amounts of recurring revenues. In the first quarter alone, over $800 million of the overall sales tally was recurring sales and this brings stability to the company's financials in terms of predicted cash flows going forward. As we see below, the potential business which can be won across QuidelOrtho's markets is significant when one takes into account the recurring theme of Clinical Chemistry's sales, the benefits of Sofia and Leapfrog in Immunoassay, and the potential that Savanna has in the Molecular market to name but a few. Again, due to the options the company will now have at its disposal, a successful integration should lead to more dollars being extracted from every single customer going forward.

Suffice it to say, we see the company's strong balance sheet, strong profitability model, and $700+ million operating cash-flow estimate beginning from next year as an excellent platform for QuidelOrtho's growth going forward. To reiterate, we believe these trends demonstrate to us that the bottom is in for this stock and now we should see shares rising to their 200-day moving average before long.

Conclusion

Therefore, to sum up, when one takes into account QuidelOrtho's technicals, strong cross-selling opportunities, and present valuation, it becomes evident that downside risk remains limited here in the share price. We look forward to continued coverage.

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