Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Investors testing Quest’s financial health

|Includes:Quest Diagnostics Incorporated (DGX), FXH, IHF, IHI, IRY, IXJ, IYH, PTH, RXD, RXL, RYH, VHT, XLV

Investors and Lab Technicians observing the credit default swaps of Quest Diagnostics may get a head start on diagnosing the raw investor emotions behind rumours of a possible bid for Australia's largest medical testing company, Sonic Healthcare. Old-school sleuths only looking at the stock prices, however, were out of luck and probably sent the patient home with a clean slate. Quest stock barely moved in New York trading yesterday and Sonic stock is up less than half a percent in Sydney trading today.

The Australian Financial Review is on a roll for the second time in a week hitting the global financial newswires - this time with talk of a possible bid for Australia's largest biggest medical testing company, Sonic Healthcare, by US-based Quest Diagnostics.

Sonic Healthcare stock has closed up about half a percent to A$10.86 in Sydney today while Quest Diagnostics, which trades in New York and hasn't opened for trading yet, closed yesterday at barely changed from the day before at US$51.83.

Investors trying to diagnose this investment by only looking at the stock, however, missed out on the spectacular symptoms (depending on your perspective) exhibited by Quest Diagnostics credit default swaps. CDS on the company soared about 60% to 125 bps today as investors worry about how Quest's financial health could be impacted by the injection of a foreign object. Although Sonic Healthcare is not believed to be toxic, like a drug it could provide a nice high for the company that come with uncertain side effects. The question for investors is how much is that high worth and whether they are willing to pay for it with a potential increase in debt financing and weakened balance sheet .

The Australian doubted the possibility quoting its sources saying there was no arbitrage opportunity given that Quest stock trades at a lower price-to-earnings ratio than Sonic does (11.3x vs. 13x.)

BusinessWeek quoted a source saying that a deal was not likely because Quest “would have to put in a huge offer to get board support... A price of A$15 which represents a 43 percent premium to Tuesday’s closing price is still not enough given that Sonic has copped a large one-off earnings hit this year.”

Regardless, the lab researchers at Sonic, which generates 83% of revenue from their pathology division, may have their most important pathology test yet - that of Quest Diagnostics in the event of a successful takeover. Investors on the outside may want to replace EBITDA's for red blood cells and a spreadsheet for the microscope in conducting their own tests before donating money to this patient.


Disclosure: long all stocks