QuidelOrtho (QDEL): Buy, Sell, or Hold Post Q4 Earnings?

Over the past six months, QuidelOrtho’s shares (currently trading at $22.11) have posted a disappointing 19.9% loss, well below the S&P 500’s 6.6% gain. This might have investors contemplating their next move.

Is there a buying opportunity in QuidelOrtho, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think QuidelOrtho Will Underperform?

Even though the stock has become cheaper, we're cautious about QuidelOrtho. Here are three reasons you should be careful with QDEL and a stock we'd rather own.

1. Declining Constant Currency Revenue, Demand Takes a Hit

Investors interested in Medical Devices & Supplies - Imaging, Diagnostics companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of QuidelOrtho’s control and are not indicative of underlying demand.

Over the last two years, QuidelOrtho’s constant currency revenue averaged 3.8% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests QuidelOrtho might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, QuidelOrtho’s margin dropped by 21.9 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. QuidelOrtho’s free cash flow margin for the trailing 12 months was negative 3%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, QuidelOrtho’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

QuidelOrtho falls short of our quality standards. Following the recent decline, the stock trades at 10.5× forward P/E (or $22.11 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the most dominant software business in the world.

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