Earnings Analysis: Quest Diagnostics Inc. (NYSE:DGX)

Quest Diagnostics Inc (NYSE:DGX) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Quest Diagnostics Inc.’s analysis versus peers uses the following peer-set: Laboratory Corp. of America Holdings (NYSE:LH), Sonic Healthcare Limited (ASX:SHL), Qiagen NV (NASDAQ:QGEN), Alere Inc (NYSE:ALR), Genomic Health, Inc. (NASDAQ:GHDX) and Bio-Reference Laboratories Inc (NASDAQ:BRLI). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 1,851.4 1,906.8 1,936.5 1,879.3 1,906.4
Revenue Growth % (2.9) (1.5) 3.0 (1.4) 0.2
Net Income 163.1 177.8 158.8 189.9 172.1
Net Income Growth % (8.2) 11.9 (16.3) 10.3 5.2
Net Margin % 8.8 9.3 8.2 10.1 9.0
ROE % (Annualized) 16.0 18.1 16.8 21.1 19.8
ROA % (Annualized) 7.0 7.5 6.8 8.1 7.3

Valuation Drivers

Quest Diagnostics Inc.’s current Price/Book of 2.4 is about median in its peer group. We classify DGX-US as Harvesting because of the market’s low expectations of growth (PE of 14.8 compared to peer median of 19.8) despite its relatively high returns (ROE of 17.9% compared to the peer median ROE of 12.4%).

The company’s asset efficiency (asset turns of 0.8x) and net profit margins of 9.1% are both median for its peer group. DGX-US’s net margin has increased 2.9 percentage points from last year’s low and is now above its five-year average net margin of 8.6.

Economic Moat

Changes in the company’s annual top line and earnings (1.9% and -35.1% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

DGX-US’s current return on assets is around peer median (7.4% vs. peer median 6.6%). This contrasts with its higher than peer median return on assets over the past five years (7.5% vs. peer median 6.1%), suggesting that the company’s relative operating performance has declined.

The company’s gross margin of 44.9% is around peer median suggesting that DGX-US’s operations do not benefit from any differentiating pricing advantage. However, DGX-US’s pre-tax margin is more than the peer median (14.9% compared to 11.1%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

DGX-US’s revenues have grown more slowly than the peer median over the last few years (1.2% vs. 9.4% respectively for the past three years) and the stock price’s relatively low PE ratio of 14.8 implies relatively low future growth as well. Overall, we view the company’s growth expectations as substandard relative to its peers.

DGX-US’s annualized rate of change in capital of 4.9% over the past three years is less than its peer median of 8.9%. This investment has generated a better than peer median return on capital of 9.1% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.

Earnings Quality

DGX-US’s net income margin for the last twelve months is around the peer median (9.1% vs. peer median of 7.9%). This average margin combined with a level of accruals that is around peer median (6.0% vs. peer median of 6.0%) suggests there possibly isn’t too much accrual movement flowing into the company’s reported earnings.

DGX-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Graph of Revenues Trend for Quest Diagnostics Inc. (NYSE:DGX)
Graph of Revenues Trend for Quest Diagnostics Inc. (NYSE:DGX)
Graph of Net Margin Trend for Quest Diagnostics Inc. (NYSE:DGX)
Graph of Net Margin Trend for Quest Diagnostics Inc. (NYSE:DGX)
Graph of Accruals Trend (% revenues, Quarterly) for Quest Diagnostics Inc. (NYSE:DGX)
Graph of Accruals Trend (% revenues, Annual or TTM) for Quest Diagnostics Inc. (NYSE:DGX)

Company Profile

Quest Diagnostics, Inc. is engaged in providing diagnostic testing, information and services that help patients, physicians and others to make better healthcare decisions. It offers patients and physicians the broadest access to diagnostic laboratory services through the company’s nationwide network of laboratories and patient service centers. The company’s services range from services range from routine blood tests such as cholesterol, Pap testing and white blood cell counts to cancer testing as well as gene-based and molecular testing. It also offers clinical testing, which include gene-based and esoteric testing, anatomic pathology services and testing for drugs-of-abuse in the United States, and risk assessment services for the life insurance industry in North America. It manufactures and markets diagnostics products like diagnostic test kits and specialized point-of-care testing equipment. The company empowers healthcare organizations and clinicians with information technology solutions that can improve patient care and medical practice. Its non-clinical testing businesses consist of its risk assessment services, clinical trials testing, healthcare information technology, and diagnostics products businesses. The company’s risk assessment services business provides underwriting support services to the life insurance industry, which include tele underwriting, specimen collection and paramedical examinations, laboratory testing, medical record retrieval, case management, motor vehicle reports, telephone inspections, prescription histories and credit checks. Its clinical trials testing business provides clinical testing performed in connection with clinical research trials on new drugs, vaccines and certain medical devices. The company’s healthcare information technology business is a developer and integrator of clinical connectivity and data management solutions for healthcare organizations, physicians and clinicians that can help improve patient care and medical practice. Its diagnostics products business manufactures and markets products that enable healthcare professionals to make healthcare diagnoses, including products for point-of-care testing for the professional market. The company was spun off from the Corning, Inc. as an independent company on December 31, 1996. Quest Diagnostics was founded in 1967 by Dr. Paul Brown and is headquartered in Madison, NJ.


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This article was originally written by abha.dawesar, and posted on CapitalCube.