A Financial Analysis of Quest Diagnostics Inc

Market-cap industry leaders sometimes are too scrutinized for real bargains to become apparent. However, this observation is relative to the industry. For example, the Healthcare Facilities industry under the Healthcare sector would fit this definition. The market-cap leader, Fresenius Medical Care AG & Co. KGAA, of about $13.9 billion is far from a household name, and the following leaders, Quest Diagnostics, Laboratory Corp. of America Holdings, and DaVita are also not very susceptible to receive media coverage on a daily basis. Nevertheless, that does not mean that these are not important companies. Quest Diagnostics (DGX) for example has an excellent fundamental history and growth plan from its business strategy. For this reason, investors should heed the following information for a chance of seeing higher capital gains.

What the company does is the most important asset provided by the company or third-party corporations investors can look at. Respective to Quest Diagnostics, Reuters claims that this company “is a provider of diagnostic testing, information and services.” More specifically Quest performs a cornucopia of testing including, “of esoteric testing, including gene-based testing, and…testing for drugs of abuse,” among routine testing. Routine testing is probably the most important component of the business. Such testing, “measure various bodily health parameters, such as the functions of the kidney, heart, liver, thyroid and other organs.” As the baby-boom generation continues to grow and becomes worrisome of health problems, these individuals will be eager to find out any detrimental-body problems. More customers leads to more demand, and more demand will lead to higher sales and higher EPS numbers. Somewhat related, Quest also focuses on esoteric testing. What these tests deal with include metabolism, genetics, and blood clots. Not only are all of these areas related to aging individuals, but overweight individuals as well. Unhealthy diets and inactive lifestyles can severely hinder people from living proper lives. As a result, tests are needed for prescription purposes, and healthcare facilities like Quest benefit once again. And as the life expectancy continues to grow higher and individuals continue to make unhealthy choices, this New Jersey-based company will please shareholders.

However, looking at the other companies in this industry, an investor may notice that most of the rivals to Quest have similar business strategies. What differentiates Quest from these competitors, however, is its strong fundamentals. According to Capital IQ, Quest has seen a year-over-year quarterly revenue rate of -1.70%. Typically it is hard to endorse a company with a negative sales rate, especially when competitors DaVita and Laboratory have positive figures, but it is important to go back to the introduction when market-cap is mentioned. As a $9.41 billion dollar publicly-traded company with over 6.24 billion dollars in revenue over the past twelve months, neither DaVita ($5.00 billion) nor Laboratory ($3.71 billion) can compete with this number. As a result, high revenue growth percentages year over year will be much tougher for Quest to earn when compared to its competitors. However, what does stand out for Quest is its high operating margins over the past year. At 17.15%, according to Reuters, this number is above the industry average at 9.94%, DaVita’s average at 15.43%, and Fresenius’s figure at 15.86%. Nevertheless, the next question that may be brought up in regards to sales is a trailing twelve month operating margins which is below the five year average. In fact, trailing twelve month gross margins, EDITD, and net profit margins are all slightly below the five year average. In many cases, investors may look at this as a sign of a company reaching diseconomies of scale and on the verge of a sell-off share price wise. However, there is still proof against this claim.

One reason to still purchase shares of this company is what was previously mentioned. With an already high revenue figure, it will be difficult for Quest to continue to find higher sales numbers every single year. What Quest needs to do is focus on earnings and net profit. And according to Reuters, Quest is doing just this. Its five years sales projections above 30% are near the industry average and beats out Laboratory (20%) and DaVita (22%). Surprisingly, Quest’s sales five year projection at near 12% beats out Laboratory’s same figure at 10%. So there is still quite a bit of potential for Quest in the future. It is true to call Quest a growth stock is a bit absurd, but because of strong future potential and present share price statistics, investors should realize that this equity is instead tremendously undervalued.

Fresenius, Laboratory, and DaVita are all near or at its respective 52 weeks high. Quest however is over 15 points below from its respective number. Currently sitting near 50 point range, even with lagging earnings over the past year, Quest still has a forward P/E ratio of 15.16 below its trailing multiple. This number is not only below the average industry figure but below Fresenius’s multiple at 24.20, Laboratory at 16.48, and almost identical to DaVita. In addition, Quest’s enterprise value to revenue (1.80), enterprise value to EBITDA (8.246), and price to sales (1.49) are below Laboratory’s respective numbers of 2.81, 10.185, and 2.49 and DaVita’s enterprise value to revenue (1.82) and enterprise value to EBITDA (9.31). Quest also has a PEG ratio of 1.18 which continues to indicate that this corporation is still growing, especially compared to Laboratory and its 1.34 respective ratio.

The management team, led by CEO Surya Mohapatra has also done well compared to the rest of the industry. Quest’s ROI (12.97), ROA (9.96), and ROE (19.63) are all above industry averages, not to mention competitor’s Fresenius respective figures as well. What is most intriguing about Quest however, is the analyst estimates for the coming quarters. Revenue and EPS surprises over the past five quarters have turned from positive to negative, and that means that Wall Street analysts are becoming more reluctant to provide guidance which may overvalue the company. As this happens, there is a higher percentage that one of the next few quarters Quest will positively surprise investors with encouraging news and higher guidance for the future. However, some investors may ask if this statement can really be made with so much conviction. Nevertheless, returning to the business plan given previously, as consumers continue to get older, routine and other tests will be required–leading to more business for this corporation.

Therefore, trading below its 50 and 200 day SMA, there is strong reason to believe that Quest is undervalued. The company has a good dividend figure at 0.83 which has been increasing over the past five years leading to a payout ratio near 14–dramatically above the industry average. The company is doing well in the places it should be performing well at, and once the baby-boom generation is fully established, this company should be a strong beneficiary.