Images By Tang Ming Tung
Since our last coverage of Co-Diagnostics, Inc. (NASDAQ:CODX), we’ve retained our neutral view on the company. Last time, our price target of $3.24 was premised by the following:
As a reminder, CODX is developing its polymerase chain reaction (“PCR”) technology. It develops a suite of diagnostic tests, ranging from Covid-19 hepatitis B, tuberculosis, HPV, malaria, and many more. It benefitted from Covid-19 in terms of revenue and core EBITDA growth.
The stock trades in-line with our price target and following its Q3 FY22 numbers we observe the same central downside themes as noted above. Shares now trade at 7.3x trailing earnings – well below sector averages – and management didn’t provide forward guidance on the earnings call. Although, we don’t think this is cheap. Further, we forecast declining EPS growth into FY23, confirming our thesis. Net-net, we retain our hold call at a $3.24 price target.
Key upside risks to the thesis include:
Exhibit 1. CODX 12-month weekly price action
The company reported its Q3 earnings 2 weeks ago. Covid-19 demand continues to weaken with testing volumes tightening globally.
Management report it is focused on pivoting the diagnostics menu away from Covid-19, however, for the time being, this is the main driver of top-line growth for the company looking ahead in our opinion.
Per CEO, Dwight Egan’s comments on the call:
“COVID wave won’t be just one wave, but a series of waves, each fuelled by different variant that form a table meso or a table-like plateau. Aside from our belief that COVID-19 will be with us for a long time, we continue to rely on the advice of experts such as Dr. Fauci, who according to Fortune, has been warning for months that a new, more immune-evasive variant will emerge over the winter. Fauci also stresses that the pandemic is far from over. The number of deaths from COVID, which still averages around 2,600 a week, remains far too high…
…This is why our focus has been and continues to be on defining and focusing on the total addressable market for our new Co-Dx PCR Home platform…
…Among the opportunities that we have already identified have been collaborations with international NGOs and nonprofits.
The interest of these groups in the new platform extends beyond COVID to other endemic diseases such as tuberculosis, which killed 1.6 million people in 2021 alone according to the World Health Organization.”
Switching to the numbers, the company saw another 83.1% YoY downturn in revenue growth to $5.1mm. This compares to $30.1mm a year ago. Covid-19 testing volume was the key driver, as mentioned. Similarly, gross profit was down c.84% to $4.3mm on a margin of ~85%.
We note the following key data points from CODX’s performance in Q3:
We agree with the company’s data that Covid-19 will be around for a long time. Question is, what that means for a company like CODX, versus large, established players with commercial leverage. It continues to push Covid-19 revenues, in an industry that increasingly looks on consolidating.
With its latest set of operating losses, future value creation is called into question. It needs to generate a return on its investments greater than the cost of capital in order to unlock corporate value.
With heavy reliance on Covid-19, that’s a concentration risk and structural headwind that we aren’t keen on gaining exposure too. Alas, with the market outlook on Covid-19 murky, this regrettably confirms our neutral position.
Turning to our last CODX publication, we priced the stock at 18x our FY23 EPS estimates, or $3.24. This was well supported by technical data, similar to that seen in the point and figure chart of Exhibit 2.
The lack of earnings upside, coupled with poor return on invested capital in the past 2 quarters renders it difficult to value CODX at a premium. You can see our EPS assumptions for CODX into FY23 below. The entire set of growth assumptions can be seen in Appendix 1.
At its current run-rate, we see it printing a loss of $0.65 per share next year. Unfortunately, this doesn’t align with the kind of equity premia we are chasing in FY22. As such, we retain our hold rating and price target of $3.24.
Exhibit 2. Forward EPS growth estimates. Key factors to note:
Data: HB Insights Estimates
Exhibit 3.Price visibility around $3.24 well supported
Net-net, we retain our hold rating at $3.24 for CODX following its latest set of numbers. We look forward to providing further coverage in the periods to come.
Appendix 1. CODX Consolidated Forward Estimates, FY22-FY23
Note: Assumptions driven by substantial YoY revenue declines in Q2 and Q3 FY22.
Data: HB Insights Estimates
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.