3 Reasons to Sell QDEL and 1 Stock to Buy Instead

What a brutal six months it’s been for QuidelOrtho. The stock has dropped 34.1% and now trades at $28.90, rattling many shareholders. This may have investors wondering how to approach the situation.

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

Why Do We Think QuidelOrtho Will Underperform?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why QDEL doesn't excite us 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 8.9% 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

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, QuidelOrtho’s margin dropped by 28.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. QuidelOrtho’s free cash flow margin for the trailing 12 months was negative 1.3%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Over the last few years, QuidelOrtho’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We cheer for all companies helping people live better, but in the case of QuidelOrtho, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 11.3× forward P/E (or $28.90 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. Let us point you toward the most entrenched endpoint security platform on the market.

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