Quest Diagnostics (DGX, Financial) has recently announced that it has the authority to repurchase a further $1 billion of its shares through 2012. In 2011, it bought back 17 million shares for a total consideration of $935 million. Shares outstanding in the company now stand at 157 million. At a share price of $58, and with a market capitalization of $9.18 billion, Quest would be able to repurchase another 17 million shares, or over 10% of its share equity.
On top of this, the company has just received a nice order for its ChartMaxx Enterprise Content Management System (ECM) from Trinity Health. It plans to roll this out to its 49 acute care hospitals, 379 outpatient facilities, and 26 long term-care facilities. And it is doing so not because of a great sales pitch, but because of the success that one of its larger facilities has had using the ECM over a period of 10 years.
Two items of news appear bullish for shareholders, but how does the company compare to peers?
Price to Earnings
With Quest Diagnostics shares changing hands at $58, the shares trade on a trailing price to earnings ratio of 19.86. This is higher than that of Bio Reference Laboratories (BRLI, Financial) at 17.36, and Laboratory Corporation of America’s (LH, Financial)17.48.
However, with earnings per share expected to come in at $4.55 for 2012, Quest Diagnostics’ forward price to earnings ratio of 11.48 is lower than these two competitors.
Dividend and Yield
Quest Diagnostics is the only one of the three companies that pays a dividend to its shareholders.
The dividend paid over the last year is $0.68 per share, yielding 1.20%, with a pay-out rate of 23%.
Margins
Profit margin at Quest and Bio Reference is around 6.5%, though Quest’s operating margin of 17.41% is some way above Bio Reference’s 10.7%
Laboratory Corp’s Operating margin of 18.88% is similar to its peers, though its profit margin of 9.38% indicates the potential for Quest’s margins.
Revenue and Earnings Performance
Last quarter’s revenue growth at Quest Diagnostics, as reported on YahooFinance, was lower than its two rivals: 3% as against 5.5% at Laboratory Corp, and19.5% at Bio Reference.
However, earnings growth at Quest came in at 14.3%, while at Laboratory holdings only a 2.7% rise was made. Bio Reference out did both companies with a 22.1% rise in its quarterly earnings.
Debt Position
Quest has the highest debt/ equity ratio of the four companies. At 108, it is above the 88 of Laboratory Corp, and markedly higher than Bio Reference’s number of just 18. However, Quest Diagnostic’s operating cash flow of $895 million is substantial enough to service this debt, and is larger than Laboratory Corp’s cash flow of $850 million. Bio Reference has cash flow of only $31 million.
Conclusion
Quest Diagnostics shares, on fundamentals, seem fairly valued, overall, in comparison to its peers.
Earnings growth has been higher than market expectation in two its last three quarters, and orders like the Trinity Health one will give these further momentum.
It has shown that it will use its authority to repurchase its shares, and this will again help earnings per share growth through 2012.
Should it keep its dividend pay out ratio at 23% then the dividend may rise to around $1 per share in 2012 More likely is a rise in the dividend to around $0.80 per share, which will continue the company’s recent history of increasing the rate of its dividend hike.
With a good operating margin, and keen management, it should be hoped that it the company will soon start producing the profit margins seen at Laboratory Corp.
The one-year chart shows the rapid rise the shares have seen since forming the second point of a "w" pattern back through August to October 2011. From a low of $45.13, the shares have risen by 28% to stand at their current level. Shares seem to be consolidating in a gently rising pattern, and I would expect this to continue. While no fireworks seem likely in the share price in the short term, I would be disappointed if they were not trading toward $70 this time next year. I recommend buying shares of Quest Diagnostics now.
On top of this, the company has just received a nice order for its ChartMaxx Enterprise Content Management System (ECM) from Trinity Health. It plans to roll this out to its 49 acute care hospitals, 379 outpatient facilities, and 26 long term-care facilities. And it is doing so not because of a great sales pitch, but because of the success that one of its larger facilities has had using the ECM over a period of 10 years.
Two items of news appear bullish for shareholders, but how does the company compare to peers?
Price to Earnings
With Quest Diagnostics shares changing hands at $58, the shares trade on a trailing price to earnings ratio of 19.86. This is higher than that of Bio Reference Laboratories (BRLI, Financial) at 17.36, and Laboratory Corporation of America’s (LH, Financial)17.48.
However, with earnings per share expected to come in at $4.55 for 2012, Quest Diagnostics’ forward price to earnings ratio of 11.48 is lower than these two competitors.
Dividend and Yield
Quest Diagnostics is the only one of the three companies that pays a dividend to its shareholders.
The dividend paid over the last year is $0.68 per share, yielding 1.20%, with a pay-out rate of 23%.
Margins
Profit margin at Quest and Bio Reference is around 6.5%, though Quest’s operating margin of 17.41% is some way above Bio Reference’s 10.7%
Laboratory Corp’s Operating margin of 18.88% is similar to its peers, though its profit margin of 9.38% indicates the potential for Quest’s margins.
Revenue and Earnings Performance
Last quarter’s revenue growth at Quest Diagnostics, as reported on YahooFinance, was lower than its two rivals: 3% as against 5.5% at Laboratory Corp, and19.5% at Bio Reference.
However, earnings growth at Quest came in at 14.3%, while at Laboratory holdings only a 2.7% rise was made. Bio Reference out did both companies with a 22.1% rise in its quarterly earnings.
Debt Position
Quest has the highest debt/ equity ratio of the four companies. At 108, it is above the 88 of Laboratory Corp, and markedly higher than Bio Reference’s number of just 18. However, Quest Diagnostic’s operating cash flow of $895 million is substantial enough to service this debt, and is larger than Laboratory Corp’s cash flow of $850 million. Bio Reference has cash flow of only $31 million.
Conclusion
Quest Diagnostics shares, on fundamentals, seem fairly valued, overall, in comparison to its peers.
Earnings growth has been higher than market expectation in two its last three quarters, and orders like the Trinity Health one will give these further momentum.
It has shown that it will use its authority to repurchase its shares, and this will again help earnings per share growth through 2012.
Should it keep its dividend pay out ratio at 23% then the dividend may rise to around $1 per share in 2012 More likely is a rise in the dividend to around $0.80 per share, which will continue the company’s recent history of increasing the rate of its dividend hike.
With a good operating margin, and keen management, it should be hoped that it the company will soon start producing the profit margins seen at Laboratory Corp.
The one-year chart shows the rapid rise the shares have seen since forming the second point of a "w" pattern back through August to October 2011. From a low of $45.13, the shares have risen by 28% to stand at their current level. Shares seem to be consolidating in a gently rising pattern, and I would expect this to continue. While no fireworks seem likely in the share price in the short term, I would be disappointed if they were not trading toward $70 this time next year. I recommend buying shares of Quest Diagnostics now.
