Medical Stocks

Quest Diagnostics Inc Valuation – January 2016 Update $DGX

Benjamin 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 10 Most Undervalued Companies for the Defensive Investor – November 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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Downloadable PDF version of this valuation:

ModernGraham Valuation of DGX

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $9,399,440,029 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.45 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 84.18% Pass
6. Moderate PEmg Ratio PEmg < 20 15.19 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.09 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.45 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 6.93 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DGX value chart January 2016

EPSmg $4.36
MG Growth Estimate 4.58%
MG Value $77.04
Opinion Fairly Valued
MG Value based on 3% Growth $63.22
MG Value based on 0% Growth $37.06
Market Implied Growth Rate 3.35%
Current Price $66.23
% of Intrinsic Value 85.97%

 

Quest Diagnostics Inc qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The Defensive Investor’s only concern is the low current ratio while the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the company meets the more stringent Defensive Investor requirements.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.

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 $4.36 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 3.35% 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 the 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.

Stage 3: Information for Further Research

DGX charts January 2016

Net Current Asset Value (NCAV) -$26.46
Graham Number $58.30
PEmg 15.19
Current Ratio 1.45
PB Ratio 2.09
Dividend Yield 2.22%
Number of Consecutive Years of Dividend Growth 1

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $1,648,000,000
Total Current Liabilities $1,133,000,000
Long-Term Debt $3,571,000,000
Total Assets $10,074,000,000
Intangible Assets $6,899,000,000
Total Liabilities $5,485,000,000
Shares Outstanding (Diluted Average) 145,000,000

Earnings Per Share History

Next Fiscal Year Estimate $4.74
Dec2014 $3.81
Dec2013 $5.54
Dec2012 $3.46
Dec2011 $2.92
Dec2010 $4.05
Dec2009 $3.87
Dec2008 $2.97
Dec2007 $1.74
Dec2006 $2.94
Dec2005 $2.66
Dec2004 $2.35
Dec2003 $2.02
Dec2002 $1.62
Dec2001 $0.83
Dec2000 $0.54
Dec1999 -$0.03
Dec1998 $0.22
Dec1997 -$0.19

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $4.36
Dec2014 $4.10
Dec2013 $4.15
Dec2012 $3.46
Dec2011 $3.34
Dec2010 $3.40
Dec2009 $3.00
Dec2008 $2.55
Dec2007 $2.34
Dec2006 $2.54
Dec2005 $2.19
Dec2004 $1.79
Dec2003 $1.34
Dec2002 $0.88
Dec2001 $0.43
Dec2000 $0.19
Dec1999 $0.01

Recommended Reading:

Other ModernGraham posts about the company

8 Best Stocks For Value Investors This Week – 10/13/15
Quest Diagnostics Inc. Analysis – October 2015 Update $DGX
The Best Companies of the Medical Industry – September 2015
The 9 Best Stocks For Value Investors This Week – 7/18/15
Quest Diagnostics Inc. Analysis – July 2015 Update $DGX

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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