By Matt Doiron
Quest Diagnostics Inc (DGX) President and CEO Stephen Rusckowski directly acquired 5,000 shares of the company on August 7th at an average price of $59.34 per share, according to SEC filings. As of this writing the stock trades at about $60, so investors have the opportunity to get in at a price at least close to where the company insider believed it was a buy. Quest provides diagnostic tests for a variety of purposes including blood analysis, allergen identification, and drug screening. The stock is up slightly so far this year, bringing the company's market capitalization to $9.5 billion. Rusckowski had previously bought 20,000 shares in early May at an average price of $56.89. Insider purchases tend to be bullish signs statistically, which is explained in theory by the fact that insiders would prefer to invest in other assets and thus diversify their risk profile if they were not confident in the company's future prospects. There have also been some insider sales at Quest Diagnostics Inc, but these may have been due to a desire to cash out and diversify (particularly as many of the sales were stock option related).
Relational Investors, whose manager Ralph Whitworth has Board experience across many corporations including at biotechnology company Genzyme, owned 4.2 million shares of Quest Diagnostics Inc at the end of March of this year. The fund had initiated its position during the fourth quarter of 2011 and reported ownership of 5.5 million shares at the end of the year (see more stock picks from Relational Investors). Ric Dillon's Diamond Hill Capital reported a 2 million share position, roughly the same number of shares the fund had owned a year ago (find other stocks in Diamond Hill Capital's portfolio).
In its most recent quarter Quest Diagnostics reported flat revenue for the second quarter of 2012. Net income rose 9%, driven by lower SGA expenses and allowing the company to match earnings after three consecutive quarters of beating expectations. Over the first half of the year, Quest Diagnostics has substantially increased its earnings per share- $2.10 compared to 67 cents in the first half of 2011. Quest Diagnostics, despite this growth, is priced at reasonable value levels in the market with a trailing P/E ratio of 14. On a forward basis, the P/E is 12 and as we have mentioned the company has a tendency to at least meet the expectations issued closest to its earnings reports. An increase in the company's dividend this past year gives it a 1.2% dividend yield at current prices.
Laboratory Corp of America (LH) is Quest Diagnostics' closest peer. Laboratory Corp of America engages in clinical lab testing for diseases and genetic conditions and saw a 25% increase in its earnings in its last reported quarter compared to the same period in the previous year. The company trades at 15 times trailing earnings and 12 times forward earnings, very similar to Quest Diagnostics. Other peers include Life Technologies (LIFE) and Alere (ALR). Both of these companies substantially grew their earnings last quarter compared to the same quarter in 2011, with Life Technologies priced at a forward P/E of 11 and Alere's multiple being 7. These companies' lower pricing is likely due to them being smaller players in the market; Alere in particular has a much lower market capitalization at $1.5 billion compared with Quest Diagnostics' $9.5 billion. We think that this insider purchase makes sense - Quest Diagnostics is priced at rather low multiples considering its recent growth - and that investors may also want to look more closely at other companies in the industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.