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 reviewing theÂ 5 Undervalued Companies to Research for the EnterprisingÂ Investor.Â 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 (DGX)Â 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 -Â 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â 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 -Â 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 -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$60.53|
|Value Based on 0% Growth||$35.48|
|Market Implied Growth Rate||3.12%|
|Net Current Asset Value (NCAV)||-$28.26|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Quest Diagnostics is suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor’s only concern is with the poor current ratio, and since the company qualifies for Defensive Investors, it also qualifies for Enterprising Investors by default. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Psychemedics Corp (PMD). Â As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.62 in 2010 to only an estimated $4.17 for 2014. This lowÂ level of demonstrated growth does not support the marketâ€™s implied estimate of 3.12% earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Quest Diagnostics (DGX)Â for more perspective!
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 (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.
Disclaimer: Â The author did not hold a position in Quest Diagnostics (DGX)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.