Quest Diagnostics (NYSE: DGX)
Quality Value Investing Research Report | Updated Coverage | March 2024
Summary:
Quest Diagnostics is a dividend-paying mid-cap stock in the health care sector’s lab services industry surrounded by a narrow economic moat.
Despite negative post-pandemic revenue growth, the company still generates sector-beating net profit margins and returns on equity and invested capital.
Quest Diagnostic’s stock price is arguably undervalued compared to its earnings, cash flow, and sales and has below-average downside risks.
Nevertheless, how quickly will management bounce back from diminished pandemic tailwinds and return to at least modest growth?
Access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets when referencing this research report. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on March 12, 2024, and intended for illustration only.
The 44 holdings in the QVI Real-Time Stock Picks have collectively achieved alpha for 15 years by focusing research and analysis on a company’s current wealth and its share price’s present value. In other words, just the facts without unreliable predictive analysis typical of the buy side or the business modeling overkill of the sell side Wall Street analysts.
In this updated QVI Research Report, we’ll look at the Expanded Real-Time Stock Picks health care sector holding Quest Diagnostics Incorporated to see if it continues to meet Quality Value Investing’s investment criteria based on our checklist analysis of the business’s current wealth and its stock’s present value.
Quest Diagnostics: Company Current Wealth
To uncover the company’s current wealth, QVI defines the value proposition, measures returns on management, and assesses enterprise downside risks.
Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including its economic moat.
Quest Diagnostics DGX 0.00%↑ is a dividend-paying mid-cap stock in the health care sector’s providers and services industry. DGX was added to the QVI Real-Time Stock Picks on January 25, 2022, at a split and dividend-adjusted $131.70 a share.
Quest Diagnostics Incorporated provides diagnostic testing and services in the United States and internationally.
The company develops and delivers diagnostic information services, such as routine, non-routine, and advanced clinical testing, anatomic pathology testing, and other diagnostic information services. It offers diagnostic information services primarily under the Quest Diagnostics brand, as well as under the AmeriPath, Dermpath Diagnostics, ExamOne, and Quanum brands to physicians, hospitals, patients and consumers, health plans, government agencies, employers, retailers, pharmaceutical companies, and insurers, and accountable care organizations through a network of laboratories, patient service centers, phlebotomists in physician offices, call centers and mobile phlebotomists, nurses, and other health and wellness professionals. The company also provides risk assessment services for the life insurance industry, healthcare organizations, and clinicians with information technology solutions.
Quest Diagnostics Incorporated was founded in 1967 and is headquartered in Secaucus, New Jersey, USA.
Economic Moat
Alpha-rich investors target companies with clear competitive advantages from their products or services. An investor can streamline an enterprise’s value proposition with an economic moat assignment of wide, narrow, or none.
For example, Morningstar assigns Quest Diagnostics a narrow moat rating.
QVI’s value proposition elevator pitch for Quest Diagnostics:
Quest Diagnostics is part of a duopoly along with Laboratory Corporation of America Holdings (LH) that dominates the independent reference lab market.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Quest Diagnostics’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Quest Diagnostics: Bullish.
Returns on Management
QVI Research Report’s returns on management or fundamentals section measures the performance strength of the company’s senior executives by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Quest Diagnostics’s trailing three-year annualized revenue growth was in the negative low-single-digits, underperforming the health care sector’s +6.22% median growth. Moreover, the company’s topline growth was -6.38% for the most recently reported twelve months.
Farther down the income statement, Quest Diagnostics’s three-year, low-double-digit positive net profit margin outperformed the sector’s negative median net margin of -5.26%.
Returns on Equity and Invested Capital
Quest Diagnostics’s senior management produced a three-year double-digit return on equity or ROE above QVI’s targeted threshold and well ahead of the sector’s negative median ROE of -42.56%.
Stock buyback programs often elevate ROE. For example, Quest Diagnostics’s board of directors approved $1 billion for repurchases in February 2023 on top of the $311 million available for buybacks at the end of 2022. $275 million of its shares was repurchased in 2023. Are they buying back the stock at value prices for its shareholders?
Quest Diagnostics’s three-year return on invested capital, or ROIC, was just above QVI’s threshold but embarrassed the sector’s negative median ROIC of -42.56%. In addition, Quest Diagnostics’s ROIC exceeded its weighted average cost of capital, or WACC, of 7.11%, demonstrating that its senior executives are above-average capital allocators. (Source of WACC: GuruFocus)
Despite negative three-year revenue growth, Quest Diagnostics generates sector-beating profit margins and returns on equity and invested capital. The negative growth reflects the return to reality in topline growth in the endemic for Quest Diagnostics’s management team in the Meadowlands.
QVI’s business fundamentals rating for Quest Diagnostics: Bullish.
Next, we’ll look at the company’s returns on management chart, enterprise downsize risks, the stock price’s present value, share price downside risks, and the investment thesis, each exclusive to Quality Value Investing’s premium (paying) subscribers.