Corporate Analysis
Dr. J. Beierlein
FINA 4734-Financial Management II
Jared M. Pyles
Table of Contents
Section 1: Introduction………........................................................................................................3
Section 2: Financial Statement Analysis.........................................................................................4
Section 3: Corporate Governance Evaluation................................................................................12
Section 4: Cost of Capital..............................................................................................................14
Section 5: Optimal Capital Structure.............................................................................................20
Section 6: Dividend Policy Evaluation..........................................................................................23
Section 7: Executive Summary......................................................................................................24
Section 1: Introduction
Quidel Corporation is a leading manufacturer of diagnostic healthcare solutions, serving
to enhance the health and well being of people around the globe with well-known and respected
products that provide healthcare professionals with accurate and cost-effective diagnostic
information at the point of care.
Quidel began its operations in 1979, and by 1984 released its first product, the dipstickbased pregnancy tests. Their product base and technology have expanded through internal
development and acquisitions of other products and technologies. Quidel’s current product areas
include infectious diseases, pregnancy, herpes, Graves' Disease, autoimmune diseases and
osteoporosis, for professional and research use. During the early 90's, Quidel successfully set out
to build its own branded business and market franchises for use in professional markets. As a
result, Quidel’s sales are mostly driven by branded business under their QuickVue® brand name,
and are currently thriving with product recognition in their target markets. In 2010, Quidel
acquired Diagnostic Hybrids (DHI) as part of a continued focus on increasing its research and
development efforts to accelerate the rate of new product initiations.
Section 2: Financial Statement Analysis
In analyzing Quidel Corporation’s financial statements, I computed several ratios to gain
a better picture of Quidel’s financial standing. These ratios included leverage and coverage
ratios, liquidity and turnover ratios, profitability ratios, and market value ratios. This analysis
will allow me to evaluate Quidel’s financial health.
Quidel Corporation appears to meet industry averages for leverage and coverage ratios
compared to its competitors in the diagnostics and research industry. From the data in the tables
provided below, one can see that Quidel’s total debt ratios are consistent from 2007-2011. With a
5-year average of 0.28, Quidel is nearly the most consistent firm in using debt to finance its
assets, falling second to Quest having a much cleaner average of 0.57 over the same 5-year
period. However, firms such as Spectral Diagnostics have very inconsistent ratios, ranging from
0.08 to 0.43. I chose to compare Quidel’s total debt ratio with its industry competitors because
Quidel’s debt/equity ratios are inconsistent from year to year. Plus, the 5-year industry averages
as a whole are much easier to compare than the highly variable debt/equity ratios. Quidel
experienced high total debt ratios in 2010 and 2011 due to their investment in long-term debt in
those years, whereas in previous years no long-term debt had been reported. This could be due to
the fact that my firm is investing in more long-term projects than in previous years, or that a new
technological development has required them to invest in new research techniques. This spike in
liabilities was over a 150% increase from 2009 and 2010. Liabilities remained high through 2011
as well.
Total Debt Ratio
2011
0.34
Quidel
0.6
Quest
0.3
Celldex
0.08
Spectral DX
2010
0.48
0.52
0.32
0.08
Debt/Equity Ratio
2011
0.5
Quidel
1.51
Quest
0.09
Celldex
0.09
Spectral DX
2010
0.91
1.1
0.09
0.09
2009
0.24
0.53
0.47
0.09
2009
0.32
1.13
0.11
2.69
2008
0.17
0.57
0
0.43
2008
0.2
1.33
0
0.75
2007
0.20
0.62
0
0.32
2007
0.24
1.58
0
0.47
Avg.
0.28
0.57
0.22
0.2
Avg.
0.43
1.33
0.06
0.82
Quidel’s equity multiplier and long-term debt ratios follow the same trend. Higher LTD
ratios and equity multipliers can indicate high leverage. As one can see in the table provided,
Quest seems to have the highest financial leverage amongst its industry peers. The fluctuations in
Quidel’s long-term debt ratios are due to the incurrence of long-term debt in recent years. The
table below provides the related information.
Long-Term Debt Ratio
2011
0.25
Quidel
0.52
Quest
0.08
Celldex
0.06
Spectral DX
2010
0.43
0.42
0.07
0.04
2009
0.08
0.47
0.08
0.21
2008
0.06
0.5
-0.01
0.08
2007
0.08
0.53
0
0.05
Avg.
0.18
0.49
0.04
0.09
Leverage Ratios
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Quidel
Industry
Total Debt
Ratio
Debt/Equity
Ratio
Equity
Multiplier
Long-term
debt ratio
Quidel’s times-interest earned and cash coverage ratios appear to be consistent with their
long-term debt financing decisions. As one can see, there seems to be spikes in these ratio
calculations. There are two reasons for this anomaly. First, as stated earlier, Quidel has made
long-term debt investments in recent years, causing interest expense in those years to rise
drastically. Also, operating incomes over the reported 5 years have varied considerably, causing
huge sways in the ratio values. Compared with the industry, it appears that Quidel is covering its
interest expenses much faster than its competitors. This means that Quidel will be able to pay off
its debt quicker than its industry peers. Along with a high TIE, Quidel also has higher cash
coverage ratios than its competitors. This goes hand-in-hand with a higher TIE, in that there is
more cash available for Quidel to cover its interest and debt payments, thus paying off
obligations faster. Based on my analysis, I believe that Quidel is doing an excellent job
managing its debt. Although they could afford more debt, I think that they should maintain its
current debt level, especially considering their recent incurrence of long-term liabilities. The
tables below provide the related information, along with a general comparison of the industries’
leverage and coverage ratios with Quidel’s associated ratios.
Quidel
Times Interest
Earned
Cash Coverage
Quidel
Operating income
(loss)
Interest expense
2011
6.60
2010
-6.52
2009
68.51
2008
42.65
2007
26.48
Avg.
27.54
28.63
11.64
117.64
98.66
73.87
66.09
2011
$13,740.00
2010
-$15,289.00
2009
$52,549.00
2008
$28,619.00
2007
$19,486.00
$2,803.00
$2,345.00
$767.00
$671.00
$736.00
Coverage Ratios
70.00
60.00
50.00
40.00
Quidel
30.00
Industry
20.00
10.00
0.00
Times Interest Earned
Cash Coverage
.
The tables below provide data regarding Quidel’s liquidity and turnover ratios. As one
can see, there appears to be consistency in comparing Quidel with its industry peers. However,
Quidel’s quick ratio of 3.84 is over 60% higher than the industry average. Basically, current and
quick ratios both measure how quickly a firm can meet its short-term debt obligations. The
current ratio is a more generic form of this measurement, as the quick ratio takes into account
less liquid assets, such as inventory. Although the current ratio appears more consistent with the
industry average, I believe that the quick ratio is a much more reasonable figure to represent
Quidel’s ability to meet short-term obligations because it creates a broader picture of Quidel’s
overall liquidity. For every dollar in current liabilities, Quidel has $3.84 in readily available
liquid assets to cover those obligations. Quidel’s inventory has a small significance on its overall
current assets, whereas the industry competitors could be holding more inventories. This could
explain why there is a substantial difference in industry current ratio and quick ratio figures.
Liquidity Ratios
5.00
4.00
3.00
Quidel
Industry
2.00
1.00
0.00
Current Ratio
Quick Ratio
Cash Ratio
Quidel’s turnover ratios are consistent with industry averages. It appears that Quidel is
paying back its suppliers just as quickly as its industry competitors with a payables turnover ratio
of 12.51. However, there are distinct differences when comparing Quidel’s inventory turnover
ratio with the industry average. There are several reasons for this occurrence. For one, Celldex
has reported no inventory over the course of the analyzed 5-year period. This exclusion of
inventory distorts the industry average to a degree. Secondly, Quest has an abnormally low
inventory turnover compared to Quidel and Spectral Diagnostics, with ratios reported as 0.02,
4.89, and 3.62 respectively. Quest’s outlier ratio of 0.02 distorts the industry average of 2.84,
which is over 25% lower than Quidel’s ratio. As a result, there are discrepancies in the inventory
period industry average as well. I believe that Quest’s small inventory turnover ratio is due to its
smaller holdings of inventory compared its total current assets. Quidel’s inventories make up just
fewer than 14% of its total current assets, whereas Quest’s inventories make up slightly over 6%
of their current assets. This small amount of inventory contributes to Quest’s small inventory
turnover.
Turnover Ratios
14.00
12.00
10.00
8.00
Quidel
6.00
Industry
4.00
2.00
0.00
Receivables
Turnover
Inventory
Turnover
Payables
Turnover
It appears that Quidel is paying back its suppliers just as quickly as its industry
competitors with a payables turnover ratio of 12.51. They are also collecting on their receivables
just as quickly as their competition. However, this is slightly inconsistent with the cash
conversion cycle. It makes sense that Quidel’s cash conversion is different than the industry
average because there are slight variations when comparing receivables and payables turnover
ratios. However, there is over a 20% difference between Quidel’s conversion and the industry
average, which is a much larger difference in comparison. The only reason possible for this is the
skewed inventory turnover I mentioned earlier in this analysis. Firms typically strive for a shorter
cash conversion cycle because this means that less of their cash is being held up in business
processes.
Turnover Ratios Cont'd
450.00
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
Quidel
Industry
Receivables
Period
Inventory
Period
Payables
Period
Cash
Conversion
Quidel’s profitability ratios are much better than its industry peers. Industry averages for
profit margin, return on assets, and return on equity all have negative figures. However, this is
due to Celldex and Spectral Diagnostics reporting negative net incomes on their individual
financial statements. The profit margin industry average suffered from this the most, with
Celldex and Spectral reporting profit margins of -3.58 and -1.40, respectively. This differs
tremendously from Quest and Quidel, who both reported profit margins of 0.08. In the research
and diagnostics industry, it is common for companies to report negative net incomes for several
years. This is due to companies’ investing into new vaccines or new research projects that cost
large amounts of money, with no returns on these investments until the release of their products.
Companies do this in hopes of making up for their losses in revenue and sale booms from the
release. The tables below provide the relevant data.
Profitability Ratios
0.20
0.00
Profit Margin
-0.20
ROA
ROE
-0.40
Quidel
-0.60
Industry
-0.80
-1.00
-1.20
-1.40
Market value ratios allow firms to see what investors think about the future prospects of
the firm on the stock market. The price earnings ratio compares the current stock price of a firm
with its earnings per share. Quidel currently has a PE ratio that is approximately three times
larger than the industry average. This is significant because this could mean that investors are
expecting growth in Quidel in the near future. However, Quidel’s market to book ratio is less
than the industry average. This ratio compares a firm’s book value with its market value. I
believe that these ratios are comparable because although the current market to book ratio is
lower than the industry average, the growth potential for Quidel could boost the value of the firm
in the near future. The chart below compares Quidel’s market value ratios with the industry
average.
Market Value Ratios
25.00
20.00
15.00
Quidel
10.00
Industry
5.00
0.00
PE
Market to Book
Enterprise Value and EBITDA
The enterprise value of a firm is the value a firm has in regards to its takeover/acquisition
price. As opposed to market capitalization, the enterprise value takes the firm’s debt into
consideration because if a firm were to acquire another, the purchasing firm would have to pay
off the acquired firm’s debt. This makes the enterprise value a much more accurate estimation of
a firm’s takeover value.
A firm’s EBITDA is its Earnings Before Interest, Tax, Depreciation, and Amortization. It
can be used along with a firm’s enterprise value to compare firms in the same industry. The ratio
EV/EBITDA is a useful tool in comparing like companies because it ignores tax effects,
allowing for the comparison of multinational companies within the same industry.
The table below shows my calculations for Quidel Corp.’s EBITDA and enterprise values. Using
a 5-year average of operating income from 2007-2011 equal to $19,821,000, I added back the
same average in regards to depreciation and amortization. This yielded an EBITDA equal to
$30,827,800.
I then calculated my firm’s enterprise value using the same period in my calculations. The tables
below provide the data used.
Finally, I calculated Quidel’s EV/EBITDA ratio, which computed to 15.47
(476,775.38/30827.80). Compared with industry peers, Quidel appears to be competing above
average. Celldex and Spectral Diagnostics both have negative EBITDA’s and EV/EBITDA
ratios. These extremely low ratios could indicate an undervaluation in these firms, although such
assumptions should not be considered. Quidel and Quests’ highly positive EV/EBITDA
calculations indicate that these firms are using more debt than its industry peers. This could mean
that these firms are investing more into current and long-term projects, or have recently invested
in capital assets.
Section 3: Corporate Governance Evaluation
Corporate Governance is the system that directs and controls a company. Corporate
governance takes into account the interests of all the stakeholders involved with the company,
including management, customers, suppliers, and financers. The tables below provide Quidel’s
Executive Management Team and Board of Director members, both of which strive to comply
with the Company’s corporate governance guidelines:
As stated in Quidel’s Corporate Governance Guidelines, the Board of Directors mission
is to represent and protect the interests of the company’s stockholders in seeking to increase the
company’s value. Although Quidel’s CEO, Douglas Bryant, is also a member of the Board of
Directors, Mark Pulido is the Chairman of the Board, ensuring that there is a separation of duties
amongst these positions. As a matter of fact, Douglas Bryant is the only member of the Board
that is also a member of Management. Quidel is striving for independence amongst its Board
members in hopes of separating power from management. This is important because the Board’s
duties include selecting the executive management team and their associated compensation.
Allowing members of the executive management team to also participate on the Board could
lead to a conflict of interest where Board and management members would be inwardly focused
on themselves and their own performance, rather than the interests of the stockholders and the
company. Quidel takes this matter seriously, as one can see from this excerpt from Quidel’s
Corporate Governance Guidelines below:
The table below from Yahoo! finance provides compensatory information related to the key
executives at Quidel:
As one can see from the table, Quidel’s CEO and other management team members took
significant pay cuts from 2009-2010. Although there is no compensatory information available
for the CEO in 2008, I would assume that the economic recession beginning in 2008 had an
effect on the massive reduction in pay. Other key executives also saw pay cuts in the same years,
such as Senior VP Robert Bujarski. I believe that these compensatory changes reflect Quidel’s
commitment to its stockholders and Company as a whole because they are not focused on giving
their management team unnecessary compensation or bonuses.
Based on the information and analysis above, I believe that Quidel maintains a strong
corporate governance structure. Quidel’s focus on independent corporate direction, separation of
duties amongst Chief Executives and Board Members, the compensation of its key executives,
and the ability of Board Members to select its management team all contribute to Quidel’s strong
corporate governance culture.
Section 4: Cost of Capital
The cost of capital is an estimate of the required returns of the firm’s investors. Using
debt and equity, the cost of capital determines how much money a company can raise to fund its
projects. In this section, I will calculate Quidel’s cost of equity, cost of debt, and its optimal
capital structure in order to estimate costs associated with raising capital. Quidel has no preferred
stock issuances, and therefore will my excluded in my calculations.
Cost of Equity
The cost of equity is the minimum rate of return a firm must offer to shareholders in
order to compensate for waiting for their returns. I have calculated Quidel’s cost of equity using
the Capital Asset Pricing Model (CAPM) approach to determine the required return. This
equation, as seen below, is used to calculate the required return from the risk free rate plus the
beta multiplied by the market risk premium:
𝑹𝒆 = 𝑹𝒇 + 𝑩(𝑹𝒎 − 𝑹𝒇)
In estimating Quidel’s beta, I used two different techniques: a regression beta and a
bottom up beta. My regression beta compared the returns of the S&P 500 and Quidel over the
past 5 years. Using the regression tool in Excel, I computed a beta of approximately 0.62, with
about 9% of the firm’s variation of returns due to market risk. This regression also has a high
standard error, meaning that the calculated beta regression does not strongly correlate with the
market, making the regression unreliable. The tables below are the correlating regression
outputs.
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.320152307
0.102497499
0.087285593
0.100317028
61
ANOVA
Regression
df
1
SS
0.067807686
MS
0.067807686
Residual
Total
59
60
0.593746856
0.661554542
0.010063506
Intercept
X Variable 1
Coefficients
0.009269762
0.618765857
Standard Error
0.012865366
0.238375455
Lower 95%
Upper 95%
-0.016473777
0.035013301
0.141777674
1.095754039
F
6.73797839
9
t Stat
0.720520635
2.595761622
Lower
95.0%
0.016473777
0.141777674
Significance F
0.011892193
P-value
0.474049636
0.011892193
Upper 95.0%
0.035013301
1.095754039
Calculating the bottom up beta uses a different technique. The bottom-up beta ignores the
significance of economic and market cycles. Rather, the bottom-up approach focuses on
individual market segments. This allows investors to direct their attention to the individual firm’s
market performances rather than comparing it with the market as a whole. After analyzing
Quidel’s 10-K statement and its products with their related revenues, I believe that my firms’
products fall into the drug and biotechnology industries. I assigned weights to each revenue
category and multiplied them accordingly. Using the average levered betas of the drug and
biotechnology industries, I calculated the bottom up beta to be 1.01. The tables below provide
the data regarding my calculations.
Levered Beta:
Drug
Biotech
Levered Beta Average
Levered
Beta
=
Unlevered
Beta*(1+(1-Tax Rate)*DE)
0.90
1.13
1.17
After calculating two different betas using the regression and bottom-up approaches, I
believe that the bottom-up beta better reflects Quidel’s market risk exposure. For one, the
regression analysis yielded unreliable outputs and an extremely low beat of 0.62. The bottom-up
beta provides a more reasonable estimation because it takes into account all revenue generating
categories of Quidel’s products. Doing so provides a more realistic and focused figure to
represent risk.
I also used a 10-year U.S. Treasury Bond rate of 2.01% as the risk free rate in my cost of
capital analysis. Using the 10-year Treasury bond rate removes the uncertainty of reinvestment
rates, therefore representing a risk-free investment. The reason I chose to use this rate as my riskfree rate is because Quidel is a research and diagnostics firm. Typically, firms in this industry
take on projects that could potentially last several years. Assuming that these projects would not
exceed 10 years, I felt that the 10-year Treasury bond rate was the most appropriate delegation
for a risk-free rate.
The market risk premium can be calculated by to methods: the implied method or the
historical method. The historical approach compares the actual returns earned on stocks over a
long time period and the actual returns earned on a default-free investment, typically a
government security (10-year Treasury bond). The difference between the two returns is the
historical risk premium. The implied method, on the other hand, is market driven and current,
meaning that it does not require any historical data. The implied risk premium can be useful
because it offers forward-looking estimates. Although historical risk premiums can be
advantageous, I believe that an implied risk premium using the S&P 500 index and a 10-year
Treasury bond rate best suits Quidel. The current implied risk premium is 5.79%.
Using all of the above information and the formula listed, I calculated Quidel’s Cost of
Equity to be 5.8% [0.0201+1.01(.0579-.0201)]. Basically, this means that it will cost Quidel
5.8% to keep investors happy enough to not sell off all of their shares.
Cost of Debt
The second part of cost of capital is cost of debt. The cost of debt is the effective rate that
a company pays on its current debt obligations. In estimating Quidel’s cost of debt, I decided to
use a synthetic rating based off of the firm’s interest coverage ratios from 2007-2011. This is due
to the fact that www.morningstar.com had no bond information available my firm. I calculated a
5-year average of QDEL’s operating income and interest expense, which were $19,821,000 and
$1,320,400 respectively. I then used these averages to calculate a 5-year interest coverage ratio
of 15.0114. In a small market cap (< $5 billion), similar firms with an interest coverage ratio
greater than 12.5 yielded typical default spreads of 0.40% and a AAA rating (Damodaran p.
157). The following cells provide the data used for my calculations.
12/31/2011
12/31/2010
12/31/2009
12/31/2008
12/31/2007
Average
Operating income (loss)
Interest expense
$13,740.00
$2,083.00
-$15,289.00
$2,345.00
$52,549.00
$767.00
$28,619.00
$671.00
$19,486.00 $19,821.00
$736.00 $1,320.40
Interest Coverage Ratio
15.01136019
Using these figures and a risk-free rate of 2.01% (U.S. 10-year treasury bond), I
computed Quidel’s pre-tax cost of debt to equal 2.41% (0.0040+0.0201=0.0241). However, these
calculations misrepresent the true cost of debt because it does not include the present value of
Quidel’s committed lease payments. I used Damodaran’s ratings.xls spreadsheet to convert
Quidel’s leases into debt. This technique provides a more reliable cost of debt because it includes
all of Quidel’s debt obligations. The table provided on the next page contains lease information
derived from Quidel’s 2012 10-K.
Years ending December 31,
Operating
Leases
Lease
Obligation
2013
$ 1,747
$ 1,117
2014
1,494
1,125
2015
702
1,134
2016
725
1,145
2017
249
1,152
Thereafter
—
3,351
$ 4,917
9,024
Total minimum lease payments
Less amount representing interest
(3,077
Present value of lease obligation
5,947
Less current portion
(380
Long-term lease obligation
)
)
$ 5,567
After converting these lease commitments into debt, I arrived at a cost of debt equal to
2.41%. Although this figure is the same as the pre-tax cost of debt calculated without lease
obligations, the conversion actually caused the interest coverage ratio to drop by 13.7% [(15.0113.20)/13.20]. However, this ratio still derives an estimated bond rating of AAA and a default
spread of 0.40%.
Cost of Preferred Stock
Quidel currently does not offer any preferred stock shares.
http://finance.yahoo.com/q/bs?s=QDEL+Balance+Sheet&annual
Market Value of Equity
The market value of equity can be calculated as the number of shares outstanding times
the current stock price. Due to the fact that the market value of equity measures the present cost
of raising funds, prolonged use of average stock prices is typically not recommended. The
following tables present the inputs used in calculating Quidel’s current market value of equity.
Date
Shares Outstanding
Stock Prices
Dec. 31,
2011
33276
$15.13
Market Value of Equity
$503,465.88
Market Value of Debt
Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is basically the average of the costs of
debt and equity financing. Using a weighted average reveals how much interest the company has
to pay for every dollar it finances. It can be calculated using the following formula:
The table below displays the inputs I used in calculating Quidel’s WACC of 5.27%
I also conducted a sensitivity analysis to determine how much variation Quidel’s WACC
could incur by using different calculated betas, risk-free rates, and market risk premiums. The
tables below detail my analysis.
Original
Regression Beta 5-Year T-Bond
Unlevered Beta
Risk-free Rate
Beta
Market Risk Premium
2.01%
1.01
5.79%
2.01%
0.62
5.79%
0.66%
1.01
5.79%
2.01%
0.95
5.79%
CAPM
5.83%
4.35%
5.84%
5.60%
Section 5: Optimal Capital Structure
Operating Income Approach
Over the past 15 years, Quidel has an average operating income of $8,805,533, with
operating losses in 1999, 2000, 2005, and as recently as 2010. This analysis provides Quidel’s
expected operating income, TIE, and the maximum debt they can afford based on their AAA
synthetic credit rating.
Quidel has incurred interest expenses in all but five years in the past fifteen. These
interest expenses are primarily for Quidel’s lease obligation associated with its San Diego
facility. The histogram below provides data relating to Quidel’s operating income (loss) over the
past 15 years.
Histogram
7
6
Frequency
5
4
3
Frequency
2
1
1.00
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
-0.60
-0.80
-1.00
0
Bin
Although Quidel has experienced several years of positive operating income throughout
the past 15 years, they have had a handful of years in which operating income is negative.
However, this is common for firms in the research and diagnostics industry, as these firms
typically take several years to complete their projects. Subsequently, when their products are
released, profits typically make up for the previous years’ losses due to research and
development.
The tables below provide data related to Quidel’s changes in operating incomes over the
past 15 years. Quidel has seen a 15 year net average in operating income of -12%. As stated
earlier, the main reason for the fluctuations in operating incomes is due to the risk associated
with being in the research and diagnostics industry. Many firms in this industry experience losses
due to their research and development of new products. Quidel’s expected worst case operating
loss is ($10,750,461). I believe this figure is misrepresentative because it is over a 180%
decrease from Quidel’s 15-year operating income average. Also, if Quidel seeks to maintain its
AAA synthetic credit rating, they can afford to borrow $96,754,153. However, I believe that
Quidel should maintain its debt policy, as stated previously in this analysis.
Operating
income
(loss)
Change in
operating
income
from prior
year
Operating
income
(loss)
Change in
operating
income from
prior year
Operating
income
(loss)
Change in
operating
income from
prior year
Operating
income
(loss)
Change in
operating
income from
prior year
2012
$8,846,000.00
2011
$13,740,000.00
2010
-$15,289,000.00
2009
$52,549,000.00
-0.36
-1.90
-1.29
0.84
2008
2007
2006
2005
$28,619,000.00
$19,486,000.00
$13,834,000.00
-$5,290,000.00
0.47
2004
0.41
2003
-3.62
-3.91
2002
2001
$3,466,000.00
$3,175,000.00
$1,816,000.00
$11,058,000.00
-0.84
2000
2.19
1999
0.09
1998
-$4,665,000.00
-$454,000.00
$1,192,000.00
9.28
-1.38
-1.68
Cost of Capital Approach
In calculating Quidel Corp.’s optimal capital structure using the cost of capital, we must
assume that this structure will ultimately minimize my firm’s cost of capital. I used an unlevered
beta in order to prevent the amount of debt my firm uses to finance its assets from affecting my
firms’ operating incomes and cash flows. Also, I verified that Quidel has maintained a
reasonably stable market value of debt ratios, as unstable ratios over a period of time can provide
a skewed optimal capital structure. Although Quidel reported a market value of debt of
$233,333,000 in 2011, the previous four years had been much more stable, with figures ranging
from $114,000,000 to $132,977,000. The table below provides the inputs used in building
Quidel’s optimal capital structure.
Using these inputs, I have found that the more debt that Quidel incurs, the lower its times
interest earned figures become. In my opinion, I believe that Quidel should incur no more than
15-20% more debt, because doing so significantly drops its times interest earned by 66%. I
believe a strong ratio is vital to the research and diagnostics industry.
Section 6: Dividend Policy Evaluation
As one can see in the tables provided, Quidel currently offers no dividends. However,
Quidel has repurchased some of its stocks over the past five years. Due to the lack of dividend
distributions, the yielding percentages are not realistic.
QUIDEL
Repurchases
Net income
EPS basic
Dividend ps
Number of shares
basic
Price
2011
2010
2009
2008
2007
(626.00)
$7,633.00
$
0.23
$
-
(9,181.00)
-$11,271.00
$
(0.40)
$
-
(33,512.00)
$32,883.00
$
1.13
$
-
(19,813.00)
$18,848.00
$
0.59
$
-
(17,858.00)
$13,631.00
$
0.42
$
-
29,026.00
13.78
31,894.00
13.07
32,706.00
19.47
33,276.00 28,514.00
15.13
14.45
I believe that Quidel should continue its repurchasing strategy. As one can see,
Quidel repurchased much more stocks from 2007-2009 as compared to 2010 and 2011. This is
because they have been transitioning their financing from less equity to more debt. This is also
consistent when looking at Quidel’s debt/equity ratios, which follows a similar trend. The table
below provides that data.
Debt/Equity Ratio
2011
0.5
Quidel
1.51
Quest
0.09
Celldex
0.09
Spectral DX
2010
0.91
1.1
0.09
0.09
2009
0.32
1.13
0.11
2.69
2008
0.2
1.33
0
0.75
Section 7: Executive Summary
2007
0.24
1.58
0
0.47
Avg.
0.43
1.33
0.06
0.82
Based on my analysis, I believe that Quidel Corporation is in a healthy financial
state. Quidel finds itself competing alongside Quest for industry leaders. Their leverage and
coverage ratios show that they are quickly covering their debt obligations. As a matter of fact,
they are leading the industry in this regard. Quidel is also a highly liquid firm, as they are quickly
able to liquidate their assets if needed to pay off short-term debt obligations. Although the firm
has experienced years of negative operating incomes, I would like to reiterate that it is common
practice for firms within the research and diagnostics industry to experience this. Most firms in
this industry are investing large amounts of capital into new technologies, vaccines, and other
medical research projects that may take several years to unfold. Therefore profits and positive
operating incomes are often not seen until later years. Even so, Quidel’s profitability ratios lead
the industry. I think that Quidel should strive to maintain its current policies. The firm clearly
balances financing through debt and equity through its repurchase of shares and incurrence of
long term debt. Quidel also maintains a focused Board of Directors and Management Team to
execute decision-making on behalf of the shareholders and the overall mission of the company.
Although Quidel is able to afford more debt, I would caution straying too far away from their
current capital structure as it seems they are performing well at this point in time. I believe that
Quidel Corporation has been performing well in the research and diagnostics industry and has
prosperous outlooks for the future.