Quest Diagnostics Stock: Market Ignoring Long-Term Outlook



Quest Diagnosis (NYSE: DGX) is a long-standing position in my “Healthy Dividends” portfolio thanks to a safe dividend and long-term growth prospects. This position has grown in size and value thanks to Quest being a mainstay in the fight against COVID-19 with their demand for molecular testing generating significant revenue growth during the peak of the pandemic. Now that the worst of the pandemic is likely in the rearview mirror, we should anticipate a drop in demand for COVID-19 testing, which could lead to Quest reporting lower year-over-year revenue. Clearly, the market likes to promote tickers that signal growth and will punish those that signal declining earnings. Therefore, investors shouldn’t be surprised by the market’s treatment of DGX, which is down about 25% from its January high. For me, I focus on the company’s impressive long-term growth trends and attractive ticker valuation.

I intend to review the company’s long-term growth trends and their prospects for future growth. Additionally, I discuss the ticker’s attractive valuation. Finally, I reveal my plan for managing my DGX position over the next year.

Interpret recent trends

As I mentioned in my introduction, Quest is expected to experience year-over-year revenue and profit declines as the COVID-19 pandemic continues to slow and testing demand will likely accompany it. Looking at the company’s second-quarter earnings, we can already see evidence of expected year-over-year declines.

In the second quarter, Quest posted total revenue of $2.5 billion, with earnings per share of $1.96, compared to $4.96 in the second quarter of last year. Quest’s adjusted EPS was $2.36 versus $3.18 last year. The company’s second-quarter reported operating profit was $388 million, or 15.8% of its revenue. However, that’s down from $533 million in the second quarter of last year, which was about 20.9% of their revenue. The company attributes the declines to lower COVID-19 testing volume. In fact, the company said COVID-19 testing revenue was about $355 million, down about 31% from the second quarter of 2021 and 41% from the first quarter of 2022.

I would say that even though the company is reporting lower year-over-year earnings, the fact remains that Quest is still on an upward trajectory from its pre-pandemic performance. . The market is reacting as if the year-over-year declines are indicative of the company’s core business and its long-term prospects. I will point to the company’s earnings history which shows that the company’s recent earnings are consistently better than pre-pandemic earnings.

Quest win history

Quest win history (Looking for Alpha)

Looking at the figure above, we can see that Quest is reporting higher EPS and revenue than pre-COVID, but the market is looking to bring the stock price back to April 2020 levels. I think the market has gone too far with this “COVID-Fade” on DGX. Indeed, the market is “forward-looking” and demand for COVID-19 tests is slowing overall. However, the market is ignoring the reality that Quest is growing its core business year on year, so the company doesn’t have to rely on COVID-19 testing for long-term growth. Additionally, the spread of variants supported the demand for COVID-19 molecular testing, and Quest’s positivity rate was around 25% in the first 2 weeks of July. Quest is still performing about 8% of COVID-19 molecular testing in the United States, up from about 4% in March. Thus, COVID-19 revenues are not broken out.

What’s my point?

Quest’s core business grows as the company increases its share of COVID-19 molecular testing. Essentially, Quest has the ability to grow independently in COVID-19 testing, but they can also leverage being a leader in COVID-19 testing at a time when demand is still high. I think investors should consider focusing on growth trends in the company’s core “meat and potatoes” business and consider COVID-19 revenue as a “sauce” at this point.

Potential Growth Opportunities

Quest has several opportunities to unlock growth in the short term and in the years to come. Regarding Quest’s core business, the company mentioned that it was “in late-stage discussions with several hospital health systems about purchasing their lab outreach business.” Additionally, Quest saw growth in access to health plans by renewing contracts with price increases. Additionally, Quest is seeing growth in direct-to-consumer testing, including testosterone, comprehensive metabolic panels, and Lyme disease testing.

Additionally, Quest has launched a molecular test for monkeypox that can “differentiate monkeypox from other orthopoxviruses.” Quest believes it will be able to perform around 30,000 tests per week and can increase capacity if needed. Monkeypox might not rise to the same threat level as COVID, however, the world will still need tests to help diagnose patients and manage the public health response.

Looking ahead, Quest is looking to launch its enhanced QuestDirect digital platform, which they claim will help it “acquire, convert and retain more customers”.

QuestDirect Steps

QuestDirect Steps (Quest Diagnostics)

As a result, Quest has updated its base business revenue for the year 2022 to be between $8.35 billion and $8.45 billion.

On the COVID front, it appears that the need for COVID-19 testing will most likely become a mainstay of infection management and public health surveillance. Fortunately, Quest’s COVID-19 strategy and execution has made it a leader in testing. Additionally, the company has increased the number of its test access points through retail relationships including CVS (CVS), Walmart (WMT) and Rite Aid (RAD) with plans to increase the number of points. of access. Importantly, the public health emergency has been extended through October, which will help maintain their reimbursement for testing. Given these points above, it must be recognized that there is still a substantial opportunity in COVID-19 testing, and Quest is positioned to maximize it. As a result, Quest raised its COVID-19 revenue forecast for 2022 to $1.15 billion from $1.30 billion.

Overall, Quest estimates that its revenue for the year 2022 will be between $9.5 billion and $9.75 billion. Looking ahead, The Street expects Quest to report lower year-over-year revenue for 2022 and 2023 as COVID-19 revenue declines.

DGX Annual Revenue Estimates

DGX Annual Revenue Estimates (Looking for Alpha)

However, Street analysts expect the company to post single-digit growth for 2024, 2025 and surpass $10 billion in revenue in 2026.

So it seems the Street expects Quest to eventually return to reporting growth as the company continues to grow its core business and capitalize on its leadership in COVID-19 testing.

Choose an assessment

Finding a reasonable valuation for an industry-leading healthcare company can be tricky, especially when there’s a dividend at stake. Fortunately, I use a variety of valuation models to smooth the results and arrive at a single value.

My discounted cash flow “DCF” out of growth over 5 years is $192.43 and that over 10 years is $216.77. My P/E Multiples model has DGX at around $300; EV/EBITDA multiples are $163.80; the power of earnings value is $142.04. Meanwhile, my “DDM” multi-step dividend remittance model has DGX at $139.55. Considering that the DGX stock price is trading at around $124 per share, we can say that the stock is trading at a discount for the valuation models. If I had to choose one, I would opt for the DCF 5-year growth release at $192.43 (up 55% from current levels) as we are concerned about the value of DGX to its future earnings.

DCF model using value investing

DCF model using value investing (Value Investing)

My plan

My plan for DGX is similar to my other healthy dividend tickers, which is to build up an oversized position over several years using an average dollar cost “DCA” strategy. However, I will be particular with my purchases given the current market environment. For this reason, I will implement a purchase threshold that will help me avoid overpaying. This threshold is intended to be a setting to help make periodic investments as long as the stock price is trading below my buy threshold by approximately $129 per share. I will also use low sensitivity on the DDM model to get a discount price of ~$111 per share, which is another metric where I will be increasing my trade size and frequency.

At the moment, DGX is trading just below my buy threshold, so I will wait to hit the buy button until I see a high conviction reversal setup on the hourly chart.

DGX Daily Chart

DGX Daily Chart (TrendSpider)

Long term, I am looking to maintain a DGX position in my Compounding Healthcare Healthy Dividend portfolio for at least five years.


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