It's rare when a company is putting up impressive growth numbers at the same time as its stock price is collapsing. However, that's the case with diagnostic test manufacturer Quidel (QDEL). Chalk it up as one more oddity to come out of a pandemic that has dramatically accelerated business for some companies while hamstringing others.
Quidel took advantage of the opportunity the crisis presented by developing tests for COVID-19, and investors jumped on board. But now, declining sales volumes for those coronavirus tests have the market worried about the company's future. With the stock well off its highs, this could be the perfect time to add it to your portfolio.
A wild ride over the past year
Quidel's growth rates were uneven even before the pandemic. Several acquisitions boosted its top line over the past few years, but a core business that ebbs and flows with the seasonal flu has made it predictably unpredictable. The deluge of testing for SARS-CoV-2 only intensified that revenue growth oscillation, propelling sales upward at a rapid rate.
Unfortunately for shareholders, Wall Street's opinion of those shares has changed several times based on projections about the course of the pandemic. The stock made a series of runs toward new highs only to slump repeatedly, first during the periods when COVID-19 cases in some areas were receding, and more recently as vaccinations have ramped up.
Nervous about the future
Even though management is now guiding for 50% growth to $2.5 billion for 2021, that forecast was lowered from $2.9 billion in March. Even worse, the change came less than one month after the original projection was offered. Adding insult to injury, Quidel cut its first-quarter guidance again in April. The updates were necessary after COVID-19 testing rates fell by 30% to 40% in February and March.
With such a large revenue source waning, it's no wonder investors are nervous. Even the lowered first-quarter projection attributes about 75% of total sales to the coronavirus. That represents a double whammy for Quidel given the well-documented scarcity of influenza cases this past winter. Revenues for flu testing are expected to be down 94% year over year. However, CEO Doug Bryant still sees a silver lining. He points to three trends that he expects will support the business through the remainder of 2021.
Dark clouds he can see through
The trends Bryant points to all relate to continued demand for COVID-19 testing. Although fewer tests will be needed overall, he believes Quidel is well-positioned for how the remaining testing market will evolve over the course of this year.
The first is that there will be ongoing demand for testing people who have symptoms of the coronavirus. What the magnitude of that demographic will be, though, can't be predicted. The second is that there will continue to be demand for at-home tests. These will be sold through retailers and pharmacies, as well as distributed by employers and schools that make negative tests a requirement for in-person activities. Quidel is prepared for the demand. Its QuickVue At-Home COVID-19 test recently received emergency use authorization from the Food and Drug Administration.
The final trend is that there will continue to be testing of asymptomatic people. Quidel's QuickVue SARS antigen tests will meet this need. In February, the company opened a new facility to manufacture them. Management has said that demand was far outstripping supply, though that news came before they cut guidance. Investors will be paying close attention during the company's upcoming earnings call for an update on this front.
Quidel remains a leader in point-of-care testing, and the cash on its balance sheet has ballooned by nearly 10 times in the past year to $490 million. With virtually no debt, the company has plenty of ammunition to make more strategic acquisitions or fund new product development. Although the past year has taken shareholders on quite a ride, the business is in its strongest position ever.
No one can say what the near term holds regarding this health crisis. That said, Quidel's stock is currently trading for less than 8 times operating cash flow. That's the lowest multiple it has seen on that metric in at least a decade, and less than one-third the multiple it was trading at when we entered the pandemic. Although management's guidance has disappointed and Wall Street has rightly punished the stock, hindsight might show that the sell-off has gone too far. The longer COVID-19 lingers as a widespread threat, the more likely it is that this will turn out to have been the case.