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Jonathan Poland
Jonathan Poland
Articles (492)  | Author's Website |

Risk-Reward With Quest Diagnostics

Flat growth hasn't slowed down the company's stock value

January 29, 2019 | About:

Quest Diagnostics (NYSE:DGX) is essentially at the same place it was 10 years ago. However, it has improve earnings per share and book value thanks to aggressive buybacks, helping the company double in value since 2009. With the stock down 22% in August, investors now have a buying opportunity.


Fact is, Quest hasn’t needed to focus on growth. It serves 50% of the hospitals and physicians in the U.S., as well as one-third of the adult population, a number expected to grow to one half by 2022.

The U.S. consumer continues to push back against rising costs and Quest’s lab tests, which measure a broad range of things such as lipids and cholesterol, cost about $17 on average. And, as hospitals struggle financially, Quest believes that it can help with lab work to reduce in-patient costs. At least that’s the plan from its recent presentation at the JPMorgan Healthcare Conference.

From a business standpoint, Quest is in good shape despite flat growth. It has big-name partners such as Ancestry.com, Safeway and Walmart, and continues to have only one real competitor, LabCorp. And, while both continue to trade at a discount, only Quest Diagnostics provides an income component with a 2.5% projected dividend yield in 2019.

Last quarter, Quest lowered its earnings expectation for 2018 to $6.30, and with its annual report coming on Feb. 14, investors won’t have to wait long to see if that was a sandbag move. Regardless of what happens, the company is still looking at double-digit growth on a per-share basis. Sales and operating profits can remain flat, because if the company keeps shrinking the amount of shares available, the stock will keep climbing. What cannot happen is what happened at IBM: declines in revenue.

In fact, Quest doesn’t need to double its sales, or even see a 50% rise in sales to benefit shareholders, but it does need those numbers stay at or above the current plateau. At this level it generates about $1 billion in free cash flow annually, enough to take back in another 30% of its stocks in this next decade. If that happens, investors will likely experience another double in share price.

However, Quest is looking to grow, and has been buying up assets to bulk up its lab testing services. It acquired ReproSource to further push into the fertility segment, which has massive future potential. Other bolt-on acquisitions from 2018 include Hurley Medical Center, Hooper Holmes and PhonePath.

At this point, trading at 13x forward earnings, 1.5x sales and 2.2x book value, the stock is in undervalued territory. If the company realizes $6.55 in 2019 and the multiple rises to its five-year average (17.7x), the stock would price in the $110 range, a 30% gain plus a $2 dividend per share. It may not be a great long-term holding, but it looks like a good short-term trade.

Disclosure: I am not long of short any stocks mentioned. 

Read more here: 

Big Pharma Tapping Genetic Testing Companies for Data to Speed Drug Development

Medicare Cuts Test Quest Diagnostics

5 Health Care Stocks in Gurus' Portfolios

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. Thanks for reading. Do your own analysis before investing. Good Luck.

Visit Jonathan Poland's Website

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