Quest Diagnostics Inventory: Market Is Overlooking Lengthy-Time period Prospects

Quest Diagnostics (NYSE:DGX) has been a longstanding place in my “Wholesome Dividends” portfolio due to a protected dividend and long-term development prospects. This place has grown in dimension and worth due to Quest being a mainstay within the battle towards COVID-19 with their molecular testing demand producing vital income development through the peak of the pandemic. Now, that the worst of the pandemic is presumably within the rearview, we’ve got to anticipate a drop in COVID-19 testing demand, which may result in Quest reporting year-over-year decreases in earnings. Clearly, the market loves to advertise tickers that report development and can punish those that report decaying earnings. Due to this fact, traders shouldn’t be stunned by the market’s therapy of DGX, which is down roughly 25% from its January excessive. For me, I’m specializing in the corporate’s spectacular long-term development developments and the ticker’s engaging valuation.

I intend to evaluate the corporate’s long-term development developments and their future development prospects. As well as, I talk about the ticker’s engaging valuation. Lastly, I reveal my plan to handle my DGX place over the subsequent yr.

Decoding the Latest Developments

As I discussed in my introduction, Quest is predicted to be reporting year-over-year decreases in income and earnings because the COVID-19 pandemic continues to decelerate and testing demand will seemingly go along with it. Trying on the firm’s Q2 earnings, we are able to see some proof of the anticipated year-over-year regressions already.

In Q2, Quest recorded $2.5B in complete revenues with earnings per share coming in at $1.96 in comparison with $4.96 in Q2 of final yr. Quest’s adjusted EPS was $2.36 verse $3.18 final yr. The corporate’s reported working revenue in Q2 was $388M, which was 15.8% of their income. Nevertheless, that is down from $533M in Q2 of final yr, which was about 20.9% of their income. The corporate attributes these declines because of decrease COVID-19 testing quantity. Actually, the corporate reported that COVID-19 testing revenues had been round $355M, down about 31% from Q2 2021 and 41% from Q1 of 2022.

I’d argue that though the corporate is reporting a year-over-year lower in earnings, the actual fact stays that Quest continues to be on an upward trajectory compared to their pre-pandemic efficiency. The market is reacting as if the year-over-year decreases are indicative of the corporate’s core enterprise and long-term prospects. I’ll level to the corporate’s earnings historical past which reveals that the corporate’s current earnings are nonetheless higher than pre-pandemic earnings.

Trying on the determine above, we are able to see that Quest is reporting superior EPS and revenues than pre-COVID, but, the market is seeking to convey the share value all the way down to April 2020 ranges. I imagine the market is taken this “COVID-Fade” too far on DGX. Certainly, the market is “forward-looking” and the demand for COVID-19 testing is total slowing. Nevertheless, the market is overlooking the fact that Quest is rising their base enterprise year-over-year, so the corporate doesn’t should depend on COVID-19 testing to develop in the long run. Furthermore, the unfold of variants has sustained the demand for COVID-19 molecular testing, and Quest’s positivity fee was about 25% within the first 2 weeks of July. Quest continues to be operating roughly 8% of COVID-19 molecular testing in the US, which is up from round 4% in March. So, the COVID-19 revenues will not be busted.

What’s My Level?

Quest’s base enterprise is rising whereas the corporate is rising their share of COVID-19 molecular testing. Basically, Quest has the flexibility to develop no matter COVID-19 testing, however they’ll additionally make the most of being a frontrunner in COVID-19 testing at a time when demand continues to be vital. I imagine traders ought to take into account specializing in the corporate’s “meat and potatoes” base enterprise development developments and see the COVID-19 income as “gravy” at this level.

Potential Development Alternatives

Quest has a number of alternatives to unlock development within the close to time period and within the coming years. Quest’s base enterprise, the corporate talked about that they’re “in late-stage discussions with a number of hospital well being techniques on the acquisition of their laboratory outreach enterprise.” As well as, Quest has seen development in well being plan entry as they renew contracts with value will increase. Furthermore, Quest is seeing development in direct-to-consumer testing together with testosterone, complete metabolic panels, and Lyme illness assessments.

Into the cut price, Quest has launched a molecular take a look at for monkeypox that may “differentiate monkeypox from different orthopoxviruses.” Quest believes that may be capable of carry out roughly 30K assessments every week and might improve capability if wanted. Monkeypox may not attain the identical stage of menace as COVID, nonetheless, the world continues to be going to want assessments to assist diagnose sufferers and handle the general public well being response.

Trying forward, Quest is seeking to debut their improved QuestDirect digital platform, which they imagine will assist them “purchase, convert and retain extra prospects.”

In consequence, Quest up to date their full-year 2022 base enterprise revenues to be between $8.35B and $8.45B.

On the COVID entrance, it appears as if the necessity for COVID-19 testing will probably change into a mainstay for managing the an infection and for public well being monitoring. Fortunately, Quest’s COVID-19 technique and execution have made them a frontrunner in testing. What’s extra, the corporate has elevated the variety of their testing entry factors by way of retail relationships together with CVS (CVS), Walmart (WMT), and Ceremony Help (RAD) with plans to extend the variety of entry factors. It is very important be aware, that the general public well being emergency has been prolonged into October, which is able to assist keep their reimbursement for testing. Contemplating these factors above, one should concede that there’s nonetheless a considerable alternative in COVID-19 testing, and Quest is positioned to maximise it. In consequence, Quest raised their COVID-19 income steering for 2022 to be $1.15B to $1.30B.

General, Quest believes their full-year 2022 revenues will are available in between $9.5B and $9.75B. Trying forward, the Road expects Quest to report year-over-year decreases in income for 2022 and 2023 as COVID-19 revenues shrink.

Nevertheless, Road analysts count on the corporate to report single-digit development for 2024, 2025, and can cross $10B in income in 2026.

So, it seems that the Road is anticipating Quest to finally return to reporting development as the corporate continues to develop their base enterprise and capitalize on their COVID-19 testing management.

Choosing a Valuation

Discovering an affordable valuation for an industry-leading healthcare firm will be difficult, particularly when there’s a dividend concerned. Fortunately, I take advantage of a wide range of valuation fashions to be able to clean out the outcomes and provide you with a solitary worth.

My discounted money move “DCF” 5-year development exit is $192.43, and the 10-year at $216.77. My P/E Multiples mannequin has DGX at roughly $300; the EV/EBITDA Multiples is $163.80; the Earnings Energy Worth is $142.04. In the meantime, my Multi-Stage Dividend Low cost Mannequin “DDM” has DGX at $139.55. Contemplating DGX’s share value is buying and selling at round $124 per share, we are able to say that the inventory is buying and selling at low cost for valuation fashions. If I had been to select one, I’d go along with the DCF 5-year development exit at $192.43 (up 55% from present ranges) since we’re involved concerning the worth of DGX for its future earnings.

My Plan

My plan for DGX is just like my different Wholesome Dividend tickers, which is to build up an outsized place over a number of years utilizing a dollar-cost common “DCA” technique. Nevertheless, I can be explicit with my buys in view of the present market surroundings. For that cause, I will implement a purchase threshold that may assist me keep away from overpaying. This threshold is meant to be a parameter to assist make periodic investments so long as the share value is buying and selling decrease than my Purchase Threshold of about $129 per share. I may also use a low sensitivity on the DDM mannequin to get a reduction value of ~$111 per share, which is one other parameter the place I’ll improve the scale and frequency of my transactions.

In the mean time, DGX is buying and selling slightly below my purchase threshold, so I’ll wait to press the purchase button till I see a excessive conviction reversal setup on the hourly chart.

Long run, I’m seeking to keep a DGX place in my Compounding Healthcare Wholesome Dividend portfolio for at the least 5 extra years.