DGX - Quest Diagnostics: Moving Past Covid

2023-10-25 05:23:57 ET

Summary

• Today, we take a look at Quest Diagnostics, a large testing and diagnostic concern that just reported Q3 results.
• Although the top and bottom line numbers slightly beat estimates, the stock is unlikely to get much of a bump out of results.
• The company will likely see both earnings and revenues fall in FY2023, thanks to a huge fall-off in Covid related tests.
• Growth is projected to return in FY2024, however.
• We take a peek at third quarter results and offer up our assessment of Quest Diagnostics in the paragraphs below.

If there was any great lesson in life it was this: No battle was ever won with silence ."? Shannon L. Alder

Today, we put Quest Diagnostics Incorporated ( DGX ) in the spotlight for the first time. This large testing concern just posted Q3 results. Will they be enough to arrest the recent slide the stock has been in over the past few months? An analysis follows below.

Company Overview:

Quest Diagnostics Incorporated is located in Secaucus, NJ. Quest is one of the largest diagnostic and testing concerns in the market and it provides myriad diagnostic testing products, information, as well as services to the healthcare industry and consumer. Like almost all testing and diagnostic concerns in the United States, Quest Diagnostics is dealing with fast failing sales from its Covid related business as the pandemic has now fully gone endemic. The company performs some 50 million tests annually in the United States which are comprised of approximately 3,500 different kinds of tests. The stock currently trades just above $122.00 a share and sports an approximate market capitalization of $13.7 million.

Third Quarter Results:

Quest Diagnostics reported third quarter numbers on Oct. 24. Non-GAAP earnings per share came in at $2.22, three cents above the consensus. Overall revenue fell 7.6% from the same period a year ago to $2.3 billion, which was some $30 million above expectations.

It should be noted that the entire decline in overall revenues was due to the ' Covid Cliff ' as coronavirus related sales fell 92% from $316 million a year ago, to just $26 million. This greatly impacted cash provided from operations from $502 million in 3Q2023 to just $207 million for this year's first quarter.

Outside of Covid related testing, Quest's Base business revenues rose 4.6% on a year-over-year basis.

Management now expects full year revenues to be between $9.19 billion to $9.24 billion, just ever so slightly above the existing consensus. Non-GAAP earnings per share are projected to be in the $8.65 to $8.75 a share range, in line with analyst expectations.

Analyst Commentary & Balance Sheet:

Bank of America reiterated its Hold rating and $150 price target on DGX right after third quarter results were posted. UBS ($135 price target), Piper Sandler ($130 price target), Truist Financial ($155 price target) and Evercore ISI ($130 price target) have also maintained Hold/Neutral ratings so far this month as well.

Just under three percent of the outstanding float of the shares is currently held short. Several insiders sold just under $2 million worth of shares collectively in the first quarter. There has been no other insider activity in the shares so far in 2023.

The company has not posted its third quarter 10-Q yet but as of its second quarter 10-Q , Quest had just over $125 million worth of cash and marketable securities on its balance sheet against nearly $3.8 billion in long-term debt. Net interest expense in the second quarter of this year was $37 million.

Verdict:

The company made $9.95 a share in FY2022 on $9.88 billion in revenues. The current analyst firm consensus has profits falling to $8.71 a share in FY2023 as sales fall some seven percent to $9.18 billion. They see two percent revenue growth in FY2024, resulting in profits rebounding a tad to $9.10 a share.

The good news around Quest Diagnostics is that this sector of the economy is defensive and should hold up well if the country heads into recession in 2024, which I think is likely. In addition, the company should return to both slight earnings and revenue growth in FY2024 as it puts Covid firmly in the rearview mirror. The stock also pays a just over 2.3% dividend yield.

The other side of the coin is there is no compelling reason to own Quest at these trading levels when short term treasuries are paying a 5.5% yield. The shares go for a non-compelling 14 times forward earnings in a fiscal year where both revenues and earnings will be down meaningfully. Quest also has a decent slug of debt on its balance sheet. Therefore, I am passing on any investment recommendation around QST at this time. If the stock fell into the low $100s, it would make a more attractive investment at that trading level.

Life gives you what you settle for. "? James Serengia

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