Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewingÂ 5 Undervalued Companies for the Enterprising Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Quest Diagnostics Inc. (DGX) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Quest Diagnostics Incorporated (Quest Diagnostics) is a provider of diagnostic testing, information and services, providing insights that enable patients and physicians to make healthcare decisions. Quest Diagnostics offers United States patients and physicians the access to diagnostic testing services through its nationwide network of laboratories and Company-owned patient service centers. The Company provides interpretive consultation through the medical and scientific staff. The Company is a provider of clinical testing, including gene-based and esoteric testing and anatomic pathology services, and the provider of risk assessment services for the life insurance industry. The Company also is a provider of testing for clinical trials and testing for drugs of abuse. In April 2014, the Company announced the acquisition of Summit Health. Combined business will be referred to as Quest Diagnostics Health and Wellness Services.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$60.92|
|Value Based on 0% Growth||$35.71|
|Market Implied Growth Rate||2.70%|
|Net Current Asset Value (NCAV)||-$25.12|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Quest Diagnostics Inc. is suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor’s only concern is the low current ratio, and while the Enterprising Investor is concerned with the level of debt relative to the current assets, he is satisfied by default since the company qualifies for Defensive Investors. Â As a result,Â value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and its competitors through a review of Psychemedics Corp (PMD) and 5 Outstanding Dow Components. Â From a valuation side of things, the company appears to be fairly valued presently, having grown its EPSmg (normalized earnings) from $3.32 in 2009 to $4.20 in 2013. Â This demonstrated level of growth supports the market’s implied estimate of 2.7% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a safety margin relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Quest Diagnostics Inc. (DGX)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Quest Diagnostics Inc. (DGX) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.