2023-07-13 02:31:44 ET
Summary
- QuidelOrtho Corporation's Sofia 2 SARS Antigen+ FIA, the first rapid antigen test that detects Covid-19, was approved by the FDA in March 2023.
- Despite strong cash flows and a 13% FCF margin, QuidelOrtho's long-term debts have grown from 0 - $2.4 billion since 2022, making investment risky.
- QDEL's shares have grown by around 50% between 2018 and 2022, but the share price is only up around 26%. The current situation lacks clarity, upcoming reports will help.
Investment Outline
The appeal of investing in QuidelOrtho Corporation ( QDEL ) comes from the clear product lines the company has which they are investing heavily into right now. Tailwinds such as regulatory clearance in China for the Vitros System are why QDEL is experiencing a diversified geographical demand right now with sales coming from all sorts of regions.
But as 2022 was a very successful year for the business, the same can be said for the first quarter to 2023 in terms of the top and bottom lines. Despite seeing geographical demand as some macro headwinds are dissipating I am right now a little skeptical about QDEL offering such a good investment opportunity. Perhaps I am proven wrong, but right now it feels better to rate QDEL a hold.
Recent Developments
Back in March of 2023, there was some positive news for one of the products that QDEL has. Their Sofia 2 SARS Antigen+ FIA got approved by the FDA. The product is the first rapid antigen test that detects Covid-19. As we have exited the pandemic there are still cases being patients being diagnosed with Covid-19, not as much as in 2020 and 2021 perhaps, but it still leaves a market for QDEL to serve. Luckily they are diversifying their revenue streams so the news of the approval here is not the only saving grace for the business. The new antigen test can detect Covid-19 within 10 minutes and it will become a go-to test device for many professionals.
Business Offerings (Investor Presentation June)
QuidelOrtho is a company that focuses on the development and manufacturing of diagnostic testing in the United States but also internationally. The company has divided its business into a few various units, those being Labs, Transfusion Medicine, Point-Of-Care, and Molecular Diagnostics. Much of the momentum comes from the labs unit, which grew revenues by 9.1% YoY most recently. Despite 2023 being expected to deliver a YoY decline in revenues when compared to 2022, $2.87 - $3.18 billion is over half of the current market cap and puts it at an FWD p/s of below 2, which I find very appealing. For me though, I see much potential catalyst for the company coming from the strong cash flows it has, which I will be discussing and diving deeper into below. Quite frankly a 13% FCF margin is impressive given its operation in the healthcare sector. A sector that has an average negative 2.3 % as the FCF margin.
Margins
As stated above, the margins of QDEL are very solid but still leave room for more upside potential.
Margin Profile (Seeking Alpha)
2022 was a fantastic year for the company as it generated $3.2 billion in revenues, a record amount in its history. This sort of skews the average margins slightly, but if we look closely, QDEL is still trading below many of its averages. As the management noted many macro headwinds easing and the clearance that Chinese regulators gave for XT 3400 and XT 7600 should accelerate growth and margin expansion further in my opinion.
Value For Investors
In terms of what investors can expect to get out of QDEL right now, it's not what you would traditionally receive perhaps, like a dividend or the company buying back shares with excess cash flows. For QDEL the value that investors are getting is more connected with what they produce and how they can leverage their position to outgrow the industry. QDEL has a 10-year average CAGR for revenues of 32% and an EPS of 13%. That makes it a growth company in my book and should be valued as such, but currently isn't. An FWD p/e under sector 20 offers solid upside potential both for buyers but also holders of shares.
Valuation
DCF Model (Author)
For QDEL I want to be looking at the cash flows and how they develop in the coming years. For 2023 I am perhaps quite optimistic about them reaching $600 million, which would be a near-record level for the company. As a reference, 2022 yielded $639 million in FCF. A terminal 9% growth rate to it was applied and that ended up with the net present value of the cash flows being $3 billion. Accounting for cash and debt here we land at $249 million instead, a massive decrease as the long-term debts of QDEL as since 2022 grown from 0 - $2.4 billion. With nearly half its market cap in debt, the buy case, unfortunately, goes away. So does it when you look at the intrinsic value of the share price right now when not accounting for debt or cash, $47 per share is still far below what the current share price is. This valuation highlights in my opinion the need that QDEL has to get back to previous revenue levels to justify the current valuation.
Risks
The primary risk with QDEL for an investor right now is the dilution of shares. The company has very successfully captured a lot of growth that the covid-19 brought. But to quickly gain market share it seems that share dilution has followed. Between 2018 and 2022 the shares outstanding have grown by around 50% which is very worrying.
Shares Outstanding (macrotrends)
But the raised capital has translated to strong revenue growth as the product lineup has been broadened. During that period though the share price is only up around 26% which still seems to leave investors with less than what they started with when accounting for dilution.
Investor Takeaway
Despite growing quickly and having fantastic margins, investing in QDEL right now seems risky until there is a comparison in the valuation and we see a recovery in the revenues. That might be 2023 as the guidance was raised in the last quarter but I'd like to stay cautious here until the coming reports provide some clarity. For the moment I am rating QDEL a hold both because of that, but also because the valuation model highlighted the large discrepancy between intrinsic value and the current share price.
For further details see:
QuidelOrtho: A Tough Call To Make Right Now