We think that Quidel (NASDAQ:QDEL) currently is a better pick compared to Abbott (NYSE:ABT). QDEL stock trades at about 3.1x trailing revenues, compared to around 5.6x for Abbott. Does this gap in Quidel’s valuation make sense? To some extent it does, if we look at the future outlook. While both the companies have benefited in the pandemic with a massive demand for Covid-19 testing, QDEL stock is being weighed down due to the concerns over declining sales volume for Covid-19 testing, given the rise in the vaccination rate. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Abbott vs. Quidel: ABT stock looks overvalued compared to QDEL stock has more details on this. Parts of the analysis are summarized below.
1. Revenue Growth
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Between 2017 and 2020, Abbott’s revenues grew by about 26%, from around $27.4 billion to $34.6 billion, primarily led by a strong growth in diagnostics business, which saw its revenue nearly double to $10.8 billion in 2020, compared to $5.6 billion in 2017. Our Abbott Revenues dashboard summarizes the segment-wise breakup of the company’s revenues. Looking at Quidel, total revenue grew a large 6x from $0.3 billion to $1.7 billion over the same period. Much of this growth came in 2020, due to a very high demand for Covid-19 testing. Over the last twelve months, Abbott has seen revenues grow by 16.3%, much lower than the figure of 211% for Quidel.
2. Operating Income
Abbott’s operating income grew 3.4x from $1.6 billion in 2017 to $5.4 billion in 2020, led by revenue growth as well as a large expansion of operating margins from 5.7% to 15.5% over the same period. The margin expansion was primarily driven by slower growth in operating expenses, primarily SG&A, compared to the revenue growth. Looking at Quidel, the operating income grew over 11x from less than $0.1 billion in 2017 to $1.1 billion in 2020, driven by both revenue growth as well as margin expansion. Quidel’s operating margins surged to 64.4% in 2020, compared to just 9.8% in 2017. Over the last twelve months, the operating margin for Abbott grew by 400 bps, compared to 4650 bps Quidel.
The Net of It All
Although Abbott’s revenue base is much larger, Quidel’s revenue as well as margin growth has comparatively been much higher. Although both the companies are benefiting from increased Covid-19 testing, QDEL stock has been weighed down over investors concerns of future sales growth. To some extent this is justified, given that Abbott is far more diversified and when Covid-19 testing declines, Abbott’s other business segments, primarily medical devices, will drive the revenue growth.
But does that mean there is no scope for Quidel’s business? We don’t think so. There is no denying that Quidel will see a decline in sales, as the Covid-19 crisis winds down, but some of the demand for testing will remain over the next few years. There may be negative test report requirement for in-person activities, possibly schools, and for 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.
Overall, the company’s revenues and earnings will surely be better than what they were in 2019. Going by consensus estimates, revenues of $1.25 billion in 2022 (marks a 25% y-o-y decline), is still 2.5x that of the 2019 figure. Looking at the bottom line, its adjusted EPS estimate of $10.55 in 2022 is 3.5x the $2.97 figure seen in 2019. But, at the current levels of $121, QDEL stock is up only 63% from the levels of around $75 seen toward the end of 2019.
Now, despite a stellar revenue and margins growth over the recent past, QDEL stock has lost more than half of its value in a matter of months (from over $250 levels in Feb 2021 to $120 now), and we think after this large correction, the difference in P/S multiple of 5.6x for Abbott versus 3.1x for Quidel will likely narrow going forward in favor of the less expensive QDEL stock.
While Quidel appears to be a better investment than Abbott, it is helpful to see how its peers stack up. Abbott Stock Comparison With Peers summarizes how Abbott compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.