Quest Diagnostics Inc. Analysis – July 2015 Update $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 Most Undervalued Companies for the Defensive Investor – June 2015.  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 stock analysis showing a specific look at how Quest Diagnostics Inc. (DGX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Quest Diagnostics Incorporated is a provider of diagnostic testing information services. The Company consists of two businesses: Diagnostic Information Services and Diagnostic Solutions. Diagnostic Information Services business, consists of two parts, develops and delivers diagnostic testing, information and services to patients, physicians, health plans, hospitals, accountable care organizations (ACOs), integrated delivery networks (IDNs), other commercial laboratories, patients and other customers. Diagnostics Information Services business also provides diagnostic information services, which includes providing clinical testing services, such as routine testing, gene-based and esoteric testing, anatomic pathology services and drugs-of-abuse testing. Diagnostic Solutions includes the Company’s other businesses, including central laboratory testing for pharmaceutical and medical device clinical trials, risk assessment services, diagnostic products and healthcare information technology.

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

  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 $73.87
MG Value $68.90
MG Opinion Fairly Valued
Value Based on 3% Growth $61.09
Value Based on 0% Growth $35.81
Market Implied Growth Rate 4.52%
Net Current Asset Value (NCAV) -$27.36
PEmg 17.53
Current Ratio 1.14
PB Ratio 2.54

Balance Sheet – March 2015

Current Assets $2,375,000,000
Current Liabilities $2,089,000,000
Total Debt $3,688,000,000
Total Assets $10,613,000,000
Intangible Assets $7,027,000,000
Total Liabilities $6,370,000,000
Outstanding Shares 146,000,000

Earnings Per Share

2015 (estimate) $4.30
2014 $3.81
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

Earnings Per Share – ModernGraham

2015 (estimate) $4.21
2014 $4.10
2013 $4.15
2012 $3.46
2011 $3.34
2010 $3.40

Dividend History


Quest Diagnostics qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned with the low current ratio.  The Enterprising Investor has concerns with the level of debt relative to the current assets, but is willing to overlook those issues since the company meets the more conservative Defensive Investor’s requirements.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.34 in 2011 to an estimated $4.21 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 4.52% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

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 Inc. (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 any 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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