Quest Diagnostics: Slightly better valuation, but still too volatile (NYSE:DGX)

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Quest Diagnosis (NYSE: DGX) is a company I have reviewed in the past. I’m about to review it again and change my goals a bit from the recent set of results. Investing well depends, in my opinion, on the twin valuation qualities and intrinsic quality of the company.

Quest Diagnostics owns one – and the company has seen an extreme recovery in 2021 due to one-time benefits.

Let’s take a look at what the future might bring for DGX.

Revisit Quest Diagnostics

The fundamental advantages of the company are quite clear. Quest Diagnostics serves a large portion of all US hospitals and physicians – around 50%, in this case. This advantage alone is worth both valuation and implies qualities. The company also holds a massive amount of patient data, processes more than 1.8 million tests daily, with 6,580 access points for retailers and patients.

It translates to serving a good third of the adult population of the United States.

The objectives of this company are also clear.

Introducing Quest Diagnostics

Introducing Quest Diagnostics (DGXIR)

The company’s market share in specific segments is impressive. The total US lab market is an $82 billion market, and the company sees this market growing 2-3% on an annual basis beyond 2022. It’s important to understand just how much COVID -19 is non-recurring in the medium and long term. term. While the revenue from the pandemic has been massive and allowed the company to really expand its operations and become more nimble, it’s something that won’t happen again in the future. This has resulted in a very high valuation, and this is the main challenge for Quest Diagnostics.

The company, of course, is looking to ensure the continuation of COVID-19 as revenue.

Introducing Quest Diagnostics

Introducing Quest Diagnostics (DGXIR)

However, in my opinion, and according to the forecast for DGX by most analysts, this will disappear in 2022-2024. Still, the company has managed to build partnerships that will survive COVID-19, and the company has some key characteristics that will drive future growth. The increase in health plans is expected to account for some of this, along with increased market share in the hospital segment. Advanced diagnostics and testing will drive growth at high single digits per year. The company will also introduce D2C testing, which is expected to generate a quarter of a million in revenue by 2025 and beyond.

This translates to a long-term 2022-2024 CAGR of 4-5% in revenue, as well as earnings growth of 7-9% EPS per year, higher due to better margins. The company also wants to target its growth through mergers and acquisitions.

The company estimates that D2C is a $2 billion market in the US alone, and DGX has a first-mover advantage here.

Introducing Quest Diagnostics

Introducing Quest Diagnostics (DGX IR)

All of this expansion should coincide with cost savings through digital, continuous process improvement, reduced denials and concessions, and increased automation.

So DGX’s key thesis is growth – but it’s growth based on pre-COVID-19 numbers. Before COVID, DGX was a company that delivered an annual EPS of around $6-7. Although it will not normalize to this level from $14.24 in 2021, the current expectation is for a normalization of $9 in 2022 and a normalization of around $8.5 in 2023, this which is the bottom of the current forecast (Source: FactSet). Most other analysts would agree with this level.

Quality is not the issue with DGX. The company is one of the highest quality healthcare services companies in all of the United States. But unfortunately, regardless of how high the normalized P/E is, it is trading at a multiple of 16-17X, which is a significant premium to its 10-year average below 15X.

There’s no outsized yield or dividend growth to reward investors here. The company’s current yield is less than 1.9%. Given that future growth estimates are limited to that $9/share level, which is by the way a very positive growth rate if we completely remove COVID-19 from the calculations, things are not looking good here. . On average and until 2024E, the market anticipates a decline in corporate earnings on average of nearly 10% per year.

This is a problem that with a bullish thesis would require some sort of different upside, return or growth potential that simply does not exist with this company.

Look, since my first post on DGX, the company has returned negative RoR if we look at the stock price today.

DGX Performance

DGX Performance (Article looking for Alpha DGX)

I consider DGX to be far too under-hedged on SA. The views and response my articles get compared to others, as well as the number of cover articles, means this company is not viewed favorably by many.

At today’s assessment, this is understandable. However, once DGX normalizes, say 10-15% higher, there will be a definite and bullish upside for this company, and I want to take advantage of that.

However, the writing for the current target is on the wall. I am far from the only analyst covering DGX who currently forecasts the company to be unable to meet its EPS targets for the years 2023-2024. UBS (UBS) did the same in February and lowered its PT to $139.

While Quest (DGX) has a fiscal 2023 profit target of $8.50, UBS said rising costs could hamper the company’s ability to meet it. “Significant cost savings and faster recovery of organic volumes at higher margins should more than offset the capital expenditures, increased labor pressures and reimbursement reductions,” the company wrote, adding that the recent leadership transition adds uncertainty to Quest’s long-term strategy. aAs a result, UBS added that the shares are expected to trade at a lower multiple, 17x instead of 18x.

(Source: Seeking Alpha/UBS)

In my opinion, even a target like this is way too rich for what the company is actually offering at this valuation.

Let’s look at where I think the business should be.

Assessing Quest Diagnostics

It’s just a thesis. Quest Diagnostics based on 2021-2022 EPS is trading at around 11X P/E – but for any normalized level it is closer to 16-17X. This might be in line with UBS’s price target of $139, at current prices of $140, but it’s still above my PT.

I want a 10-12% conservative to a good valuation. I don’t understand here. A cautious rise in FV to a P/E of 15X at today’s valuation gives us an annualized RoR of less than 2% through 2024.

FAST DGX Upside Charts

FAST DGX charts upside down (FAST Charts)

This chart pretty much sums up the problem with DGX today. Future earnings will be negative. It’s not something I or other analysts expect. These are the company’s own forecasts.

Even if the company outperforms slightly, which I doubt, the resulting returns wouldn’t be that impressive anyway. In my opinion, investing in one of the dozens of undervalued or fairly valued telecommunications companies would yield better investment results.

S&P Global gives us a price target for DGX with a range of around $129 to $185, with an average of $147. My own PT is closer to $120, which would give the company enough of an edge at today’s price.

I looked for forecast adjustments that might justify the higher upside that other analysts are giving the company here. I haven’t found any that do this. The company is rated BBB+ and has low leverage, but also low yield and does not have the growth benefit that I would like to see with companies I would invest in at such multiples compared to historical levels and future.

While I understand investors who consider this one a “BUY” based on security, security is not enough for me. Quality is not enough. I want an assessment. DGX still lacks a level that makes it attractive, even though I move my PT to $120.

Thesis

DGX’s thesis is as follows:

  • It is a major player in the healthcare and laboratory services market. He has the proven and admirable ability to generate attractive returns from exceptional clients and markets. At the right price, this company is a definite “BUY” for me.
  • However, at $140, this company is overpriced. I currently don’t see an attractive RoR for the company based on current valuations.
  • I would be interested in $120/share.
  • DGX is a “HOLD”.

Remember, I’m all about:

1. Buy undervalued companies – even if that undervaluation is slight, not massive – at a discount, allowing them to normalize over time and reap capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and enters overvalued, I reap gains and rotate my position to other undervalued stocks, repeating #1.

3. If the company does not go into overvaluation, but is within a fair value, or goes back down into undervaluation, I buy more if time permits.

4. I reinvest the proceeds of dividends, labor savings or other cash inflows as specified in #1.

DGX is currently in “HOLD”.

Thanks for the reading.

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