Quest Diagnostics (DGX) and IMS Health (RX) were among the latest to be awarded Morningstar's 5-star status, reported Jeff Viksjo yesterday, in recognition of what Morningstar considers their "especially compelling value".
Quest Diagnostics is a leading provider of laboratory testing services, and according to Morningstar analyst Alex Morozov, is the largest player in the independent diagnostic services field and a leader across all major product lines. Mozorov finds that Quest is well-placed to grow through acquisitions of smaller players, its continued investment in new technology and its commitment to quality. There is a downside though: Quest is naturally at the mercy of regulatory changes, and may also be affected by increased in-house testing by hospitals. However Morningstar believes the stock is ripe for a bounce back this year, particularly as it has yet to recover since losing its largest customer over a year ago.
Morozov points out that the firm has successfully renewed the majority of its remaining contracts, integrated the acquisition of a large anatomic pathology business, rolled out a myriad of state-of-the-art diagnostic tests, and continues to expand its geographic presence nationwide. Quest also generates robust operating cash flows, close to $1 billion per year, which Morozov contends should make its cash-flow yield of almost 10% attractive to a long-term investor.
IMS Health provides salesforce effectiveness, product portfolio optimization, brand management, and consulting services to the pharmaceutical industry. Morningstar analyst Rafael Garcia notes that IMS Health's great asset is its global database of drug prescription and sales information, covering more than 1 million products. Garcia recognizes that the company is sensitive to any potential legislative changes, which have been encouraged by the commercial use of prescribing data. Though a recent legislative attempt was defeated in New Hampshire, other U.S. states have similar plans in the pipeline. But for all that, Morningstar believes IMS is taking the brunt of a market-wide overreaction to the industry's woes:
Some pharmaceutical companies are currently redesigning their sales and marketing operations, which have delayed the closing of a few transactions with IMS. Nonetheless, in light of the recent slowdown in demand for some of its solutions, Garcia likes that IMS is successfully adding profitable new services, such as business process outsourcing. Moreover, Garcia believes that the market is overly concerned by recent legislative initiatives aiming to restrict the collection and use of drug sales information for profit purposes. These proposals were contained to a couple of states, and most importantly, have been struck down, indicating that such laws are difficult to enact.
