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 Companies Benjamin Graham Would Invest In Today - July 2016. 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 information services. The Company operates through two businesses: Diagnostic Information Services and Diagnostic Solutions. The Company’s Diagnostic Information Services business 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, employers and others. The Company’s Diagnostic Solutions offers a range of solutions for insurers and healthcare providers. The Company provides risk assessment services for the life insurance industry. In addition, the Company offers healthcare organizations and clinicians’ health information technology solutions and diagnostic products. ExamOne provides risk assessment services to the life insurance industry in North America. ChartMaxx is the Company’s enterprise content management system for hospitals.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of DGX – July 2016
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 | $11,774,346,808 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.36 | 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 | 60.26% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 18.07 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 2.67 | Pass | |
| 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 | 1.36 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 9.61 | 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
| EPSmg | $4.72 |
| MG Growth Estimate | 5.49% |
| MG Value | $91.91 |
| Opinion | Fairly Valued |
| MG Grade | B- |
| MG Value based on 3% Growth | $68.44 |
| MG Value based on 0% Growth | $40.12 |
| Market Implied Growth Rate | 4.79% |
| Current Price | $85.31 |
| % of Intrinsic Value | 92.82% |
Quest Diagnostics Inc qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $3.46 in 2012 to an estimated $4.72 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 4.79% 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.
Quest Diagnostics Inc performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$28.61 |
| Graham Number | $60.49 |
| PEmg | 18.07 |
| Current Ratio | 1.36 |
| PB Ratio | 2.67 |
| Current Dividend | $1.56 |
| Dividend Yield | 1.83% |
| Number of Consecutive Years of Dividend Growth | 2 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 6/1/2016 |
| Total Current Assets | $1,510,000,000 |
| Total Current Liabilities | $1,111,000,000 |
| Long-Term Debt | $3,835,000,000 |
| Total Assets | $10,109,000,000 |
| Intangible Assets | $6,986,000,000 |
| Total Liabilities | $5,572,000,000 |
| Shares Outstanding (Diluted Average) | 142,000,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $5.07 |
| Dec2015 | $4.87 |
| 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 | $2.06 |
| 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 | $4.72 |
| Dec2015 | $4.40 |
| Dec2014 | $4.10 |
| Dec2013 | $4.15 |
| Dec2012 | $3.46 |
| Dec2011 | $3.34 |
| Dec2010 | $3.40 |
| Dec2009 | $3.00 |
| Dec2008 | $2.55 |
| Dec2007 | $2.35 |
| Dec2006 | $2.54 |
| Dec2005 | $2.19 |
| Dec2004 | $1.80 |
| Dec2003 | $1.35 |
| Dec2002 | $0.88 |
| Dec2001 | $0.43 |
| Dec2000 | $0.19 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
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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