Quest Diagnostics Inc. Quarterly Valuation – October 2014 $DGX

200px-Quest_Diagnostics.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Defensive Investor - October 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Quest Diagnostics Inc. (DGX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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.
DGX Chart

DGX data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 -FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $63.36
MG Value $62.32
MG Opinion Fairly Valued
Value Based on 3% Growth $60.11
Value Based on 0% Growth $35.24
Market Implied Growth Rate 3.39%
Net Current Asset Value (NCAV) -$28.69
PEmg 15.28
Current Ratio 1.20
PB Ratio 2.25

Balance Sheet – June 2014

Current Assets $1,505,000,000
Current Liabilities $1,258,000,000
Total Debt $3,738,000,000
Total Assets $9,757,000,000
Intangible Assets $7,141,000,000
Total Liabilities $5,665,000,000
Outstanding Shares 145,000,000

Earnings Per Share

2014 (estimate) $3.95
2013 $5.54
2012 $3.46
2011 $2.92
2010 $4.05
2009 $3.87
2008 $2.97
2007 $1.74
2006 $2.94
2005 $2.66
2004 $2.35

Earnings Per Share – ModernGraham

2014 (estimate) $4.15
2013 $4.15
2012 $3.46
2011 $3.34
2010 $3.40
2009 $3.00

Dividend History
DGX Dividend Chart

DGX Dividend data by YCharts


Quest Diagnostics is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the low current ratio, and the Enterprising Investor is willing to overlook concerns regarding the debt level relative to the current assets because the company qualifies for the more conservative Defensive Investor.  As a result, value investors  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.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.40 in 2010 to an estimated $4.15 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 3.39% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out previous ModernGraham valuations of Quest Diagnostics (DGX) for a better perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Quest Diagnostics (DGX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Quest Diagnostics (DGX) or 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.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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