Despite A 3x Move Quidel Stock Can Gain More

Despite a stellar 2.6x rise since the March 23 lows of this year, at the current price of around $230 per share we believe Quidel (NASDAQ:QDEL), best known for its diagnostic healthcare products, looks attractive and it has more room for growth. Quidel stock has rallied from $88 to $230 off the recent bottom compared to the S&P which moved 50%, with resumption of economic activities as lockdowns are gradually lifted. Quidel stock is also up 370% from levels seen in late 2018.

Quidel stock has been on a strong rally this year. It increased gradually from $75 in early January to under $88 on March 23, significantly outperforming the broader markets, with the S&P500 down over 30% during the same period, and the stock further rallied to near $230 now. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential given its massive uptick in sales and margins after the emergency use authorization by the US FDA for its Sofia antigen testing for Covid-19.

Most of the 370% growth in the stock since 2018 actually came in this year, and it can primarily be attributed to the expected growth for the company over the coming years. Looking back, Quidel’s earnings grew 3% in 2019, led by revenue growth of 2%, margin expansion of 4%, partly offset by 1% growth in shares outstanding. Given the company’s recent performance in Q2, and its role in Covid-19 testing, its P/E multiple has expanded from around 25x in 2019 to 77x currently, based on trailing earnings. We believe the stock is likely to see more upside despite the recent rally. Our dashboard, ‘What Factors Drove 370% Change in Quidel Stock between 2018 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower demand for medical devices. This trend has impacted sales of several medical devices companies. However, Quidel benefited in the the current pandemic with regulatory authorization for the Sofia device to detect SARS-CoV-2. The company’s sales surged a strong 86% in Q2. Not only did the company see its revenue grow, its net margins expanded significantly from 14% in Q2 2019 to over 40% in Q2 2020, resulting in stellar 5x growth in net income of $81 million on an adjusted basis in Q2.

The company has seen expansion of its testing and it currently manufactures 500,000 tests a week. Quidel is currently working on multiple new tests, including Influenza A+B and SARS Antigen rapid point-of-care combination test, and Influenza A+B, SARS Antigen, and Respiratory Syncytial Virus (RSV). Also, the company provided a strong outlook for Q3 with sales estimated to be north of $375 million, which compares with sales of $126 million in Q3 2019. Going by consensus, Quidel’s full year revenues are estimated to top $1.2 billion, reflecting 130% y-o-y growth, and earnings estimate of $11.99, reflecting a whopping 300% growth. Looking at valuation, despite a 3x move, at levels of $230, QDEL stock is currently trading at just 19x its forward earnings, compared to levels of 25x seen in 2019, before the Covid-19 pandemic. We thus believe that there is a significant upside for QDEL stock in the near to medium term.

It is not that the company’s benefits are limited to 2020, the demand for the Sofia device will likely remain robust over the coming years. Also, the company has multiple non Covid-19 related products in its pipeline. As such, the company will likely see steady earnings growth over the coming years. Looking at the broader market, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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