On September 26, 2023, Quest Diagnostics Inc (DGX, Financial) experienced a daily gain of 0.89%, despite a 3-month loss of 11.7%. With an Earnings Per Share (EPS) (EPS) of 6.87, the question arises: is the stock modestly undervalued? This article aims to answer that question by providing a comprehensive valuation analysis of Quest Diagnostics. Read on to gain valuable insights into the company's financial health and future prospects.
Company Overview
Quest Diagnostics Inc (DGX, Financial) is a leading independent provider of diagnostic testing, information, and services in the U.S. The company generates over 95% of its revenue through clinical testing, anatomic pathology, esoteric testing, and substance abuse testing. The specimens for these tests are collected at its national network of about 2,300 patient service centers, as well as multiple doctors' offices and hospitals. Quest Diagnostics also runs a much smaller diagnostic solutions segment that provides clinical trials testing, risk assessment services, and information technology solutions.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line gives an overview of the fair value at which the stock should ideally be traded.
According to GuruFocus Value calculation, Quest Diagnostics (DGX, Financial) appears to be modestly undervalued. At its current price of $125.41 per share and the market cap of $14.10 billion, Quest Diagnostics stock shows every sign of being modestly undervalued. As a result, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Quest Diagnostics has a cash-to-debt ratio of 0.03, which is worse than 96.93% of 228 companies in the Medical Diagnostics & Research industry. The overall financial strength of Quest Diagnostics is 6 out of 10, which indicates that the financial strength of Quest Diagnostics is fair.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Quest Diagnostics has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $9.50 billion and an Earnings Per Share (EPS) of $6.87. Its operating margin of 12.44% is better than 69.43% of 229 companies in the Medical Diagnostics & Research industry. Overall, GuruFocus ranks Quest Diagnostics's profitability as strong.
The average annual revenue growth of Quest Diagnostics is 43.4%, which ranks better than 83.33% of 204 companies in the Medical Diagnostics & Research industry. The 3-year average EBITDA growth is 38.3%, which ranks better than 78.84% of 189 companies in the Medical Diagnostics & Research industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Quest Diagnostics's ROIC is 8.19 while its WACC came in at 6.81.
Conclusion
In conclusion, the stock of Quest Diagnostics (DGX, Financial) shows every sign of being modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 78.84% of 189 companies in the Medical Diagnostics & Research industry. To learn more about Quest Diagnostics stock, you can check out its 30-Year Financials here.
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