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Quest Diagnostics Inc (DGX), Laboratory Corp. of America Holdings (LH): Why This Health Care Stock Is a Good Value

End market conditions aren’t great for diagnostics information services company Quest Diagnostics Inc (NYSE:DGX), but that doesn’t stop it from being a good value. If you’re looking for a value play whose prospects are tied to its internal execution rather than the economy, Quest Diagnostics Inc (NYSE:DGX) could fit the bill. It’s worth a look for investors looking to balance their portfolio.

Quest Diagnostics Inc (NYSE:DGX)

Quest’s quest gets harder
It’s been a tricky year for companies servicing hospitals, and Quest Diagnostics Inc (NYSE:DGX) has suffered as physician office visits and hospital admissions have come in lower in the first half of 2013 than in 2012. Indeed, during its conference call, the company outlined that growth “is not as strong as what we thought we were going to see this year.” Moreover, after being “encouraged by April numbers,” conditions appeared to get worse. Subsequently, Quest Diagnostics Inc (NYSE:DGX) cut its full-year revenue guidance to a decline of 1% to 2%, from its previous forecast of flat to 1% growth. In addition, the high end of earnings per share guidance was cut by $0.05, leaving the new range at $4.35 to $4.50.

It’s never good news to see a company cutting guidance, but Quest Diagnostics Inc (NYSE:DGX)’s real aim this year is to restructure its business so it can regain any market share lost to rivals like Laboratory Corp. of America Holdings (NYSE:LH) and Bio-Reference Laboratories Inc (NASDAQ:BRLI). Quest Diagnostics Inc (NYSE:DGX)’s management has acknowledged that it hasn’t grown in line with the market , and this can easily be seen by looking at its growth rates compared with those of its peers.

LH Revenue TTM Chart

LH Revenue TTM data by YCharts.

Its chief competitor, Laboratory Corp. of America Holdings (NYSE:LH), managed to grow its organic volumes at 1.4% in the last quarter and is forecasting 2% to 3% revenue growth for the full year. This is a far cry from Quest’s forecast of declining revenues.

The real question is: What is Quest doing to get back to industry growth rates?

Quest restructures and goes for growth
Earlier in the year, Quest outlined its five-point program to get back on track; I discussed this in more detail in a previous article. The good news from the company’s latest earnings results is that it appears to be executing well on the plan. The recent sale of its royalty rights to ibrutinib (an experimental cancer therapy) to Royalty Pharma for $485 million  is in line with its strategy to focus on diagnostic information services. The proceeds of the disposal will also help it to return cash to shareholders.

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