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We believe that the stock price of Quidel (NASDAQ: QDEL), a clinical genetic testing company, looks undervalued at current levels near $108. QDEL stock is actually up just 22% from levels of around $88 it was at on March 23, 2020, when broader markets made a bottom. This compares to the S&P which has risen 87% over the same period. The underperformance can be attributed to the mounting concerns of a decline in Covid-19 testing demand, given the large scale vaccination programs undertaken by several governments. But now that the stock has seen a large drop (down 33% in the last one year) despite revenue growing 232% y-o-y over the last four quarters, we believe QDEL stock is oversold, and it will likely see a rebound in the near term. Our dashboard ‘Buy Or Fear Quidel Stock‘ provides the key numbers behind our thinking.

Looking at a longer time period, QDEL stock is up 122% from levels of under $50 seen toward the end of 2018. The rise in the stock price over the last two years or so can be attributed to favorable changes in the company’s EPS. The company’s revenues surged 218% to $1.7 billion in 2020, compared to $0.5 billion in 2018. Much of the growth came in 2020, driven by Covid-19 tests. Quidel’s net margins also expanded 243% to 49% in 2020, compared to 14% in 2018, given the company’s operating expenses grew at a much slower pace, compared to its revenues. The company’s shares outstanding increased 11% over the same period due to share issuances. This means that on a per share basis, the company’s earnings grew a whopping 9x to $19.24 in 2020, compared to $1.95 in 2018.

Despite a stellar growth in EPS, the company’s P/E multiple contracted from levels of over 25x in 2018 to 9x in 2020. Furthermore, given the sharp decline in QDEL stock over the recent months following the increased vaccination rate, the P/E multiple has now plunged to 6x, and we believe that the P/E multiple will likely rise going forward.

Outlook

Quidel has seen strong growth in 2020, primarily due to a very high demand for Covid-19 testing. The company’s Sofia and QuickVue antigen tests have already secured the emergency use authorization by the U.S. FDA, while its Lyra test is still pending for the regulatory approval. These tests have helped Quidel’s sales skyrocket in 2020, and this trend continued in Q1 2021, as well. Quidel reported a 2x jump in revenues in Q1, while its EPS surged 4x to $4.09, compared to $0.93 in the prior year quarter.

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Given the kind of numbers the company has reported, the stock should have been skyrocketing, but that is not what is really happening. QDEL stock did surge from levels of under $90 to levels of around $250 as recently as end of January 2021. However, the stock plummeted 57% to levels of around $108 now. Why? Because Covid-19 testing led the company’s sales higher and now with several countries working fast on vaccination, the demand for testing is bound to decline. More than 40% of the U.S. population is fully vaccinated, and the numbers will keep getting higher. This essentially means the demand for testing will decline. That said, the keyword being “decline,” as we believe the demand is not going to fade away anytime soon.

There may be negative test report requirement for in-person activities, possibly schools, and for air travel. Quidel’s QuickVue, an at-home Covid-19 test, has already secured the emergency use authorization from the U.S. FDA, and it can address this demand. The company also has QuickVue SARS antigen test to meet the requirement of testing for asymptomatic people. It’s not just 2021, the demand is likely to stay for the next few years. There is no denying that Qudiel’s sales will see a decline as the Covid-19 crisis winds down, and impact its earnings. But is the impact on earnings as big as it has been on its stock? We don’t think so.

The consensus estimates for Quidel EPS indicate an 8% drop in 2021, and roughly a 42% drop (y-o-y) in 2022. Since the stock is being sold based on the decline in future earnings, it is best to look at 2022 figures for QDEL stock. So, at the current levels of $108, QDEL stock is trading at 10x its expected EPS of around $10.55 in 2022. This compares with levels of 16x seen in 2018.

In terms of Covid-19 testing, Quidel can be compared with Abbott, which is trading at 22x its 2022 expected EPS of $4.86. Although Abbott is far more diversified and it has multiple businesses to support its earnings, that does not justify such a large valuation gap in the two companies. Furthermore, Quidel is sitting on a cash balance of close to $1.0 billion, and it does not have any debt. It won’t be surprising if the company were to explore other companies to boost its long-term revenue growth.

Lastly, the average analyst price estimate for QDEL stock is around $173, reflecting a large 60% premium to the current market price of $108, and we also believe that Quidel is significantly undervalued at the current levels.

While QDEL stock looks undervalued, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Mettler vs. Abbott

See all Trefis Featured Analyses and Download Trefis Data here

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