Quest Diagnostics: Valuation Looks Good As Covid Testing Demand Tapers

Summary

  • The Health Care sector sports relative strength during the latest market drop.
  • Quest Diagnostics should see profits fall somewhat as Covid wanes, but there are other upside risks in this low P/E stock.
  • The technical picture shows the stock hovering at critical support ahead of the company's speaking engagement next week at a Morgan Stanley conference.

Nurse preparing patient to do a blood analysis

mixetto

The Health Care sector continues to reassert itself as a source of stability in a topsy turvy market. The Health Care Select Sector SPDR ETF (XLV) has outperformed the S&P 500 Trust ETF (SPY) by about four percentage points since the top in stocks nearly a month ago. Health Care features a few diverse areas from defensive pharmaceuticals to somewhat cyclical medical device suppliers to downright speculative niches like biotech. One name has underperformed off the June low in the S&P 500 and finds itself trading at an attractive valuation. But shares are stuck in a range. Let's get a pulse on if it's a buy now or not.

Health Care Lost Relative Steam During July, But Alpha Has Ticked Up Lately

Health Care Lost Relative Steam During In July, But Alpha Has Ticked Up Lately

Stockcharts.com

According to Bank of America Global Research, Quest Diagnostics (NYSE:DGX) is the largest provider of clinical diagnostic testing and related services in the U.S., delivered through a national network of full-service clinical laboratories and over 2,200 patient service centers. The stock is a 5.4% weight in the ETFMG Treatments, Testing, and Advancements ETF (GERM) and a 3% holding in the iShares U.S. Healthcare Providers ETF (IHF).

The New Jersey-based $15 billion market cap Health Care Providers & Services industry company trades at just 10.8 times last year's GAAP earnings. It pays a dividend slightly above the yield of the S&P 500, according to The Wall Street Journal. Analysts at BofA see earnings declining this year and next, in the wake of the Covid-19 pandemic and the huge surge in testing as a result. There are upside possibilities, though, from higher lab consolidation due to Medicare reimbursement cuts, says BofA. Downside risks include inflation and weak test volume growth.

Still, at under nine times this year's operating earnings, there's clearly a high degree of earnings weakness priced in. Moreover, dividends are forecast to be on the increase. Quest's EV/EBITDA multiple is within its historical range while free cash flow yield is strong, helping to increase the chance of future shareholder accretive activities.

Quest: Earnings, Valuation, Dividend Forecasts

Quest: Earnings, Valuation, Dividend Forecasts

BofA Global Research

Quest's corporate event calendar has been busy. According to Wall Street Horizon's data, the company presented at two conferences this past week and is slated to speak at the Morgan Stanley 20th Annual Global Healthcare Conference that takes place Tuesday through Thursday next week. Jim Davis, CEO-elect, and Sam Samad, EVP and CFO are set to deliver remarks. Conferences are one of a number of events that can cause stock price volatility as industry and company-specific news sometimes break.

The stock then goes ex-div on Monday, October 3 before its Q3 earnings date of Thursday, October 20.

DGX Corporate Event Calendar: Conference On Tap

DGX Corporate Event Calendar: Conference On Tap

Wall Street Horizon

The Technical Take

DGX continues to attract buyers in the $124 to $126 range. It has had four visits to that spot since June of last year. On the upside, there's resistance in the low to mid-$140s after falling sharply from its early 2021 peak of $174. So for now, there's just a trading range that needs to be monitored. A bearish breakdown below $124 or so would trigger a price objective to about $105. A breakout above the mid-$140s would yield a measured move target to $165.

DGX: Clear Support & Resistance Areas To Eye

DGX: Clear Support & Resistance Areas To Eye

Stockcharts.com

The Bottom Line

I like DGX here based on a reasonable valuation and dividend growth. While EPS growth looks like it will stagnate, that appears discounted into the firm's market value. The stock must hold the mid-$120s right now, and a conference next week could bring some volatility. Being long here with a stop under $120 makes sense for traders while long-term investors should like the valuation.

This article was written by

CFA & CMT Charterholder | Freelance Financial Writer at SoFi & Ally | Investments | Markets | Personal Finance | RetirementI create written content used in various formats including blogs, emails, white papers, and social media for financial advisors and investment firms in a cost-efficient way. My passion is putting a narrative to financial data. Working with teams that include senior editors, investment strategists, marketing managers, data analysts, and executives, I contribute ideas to help make content relevant, accessible, and measurable. Having expertise in thematic investing, market events, client education, and compelling investment outlooks, I relate to everyday investors in a pithy way. I enjoy analyzing stock market sectors, ETFs, economic data, and broad market conditions, then producing snackable content for various audiences. Macro drivers of asset classes such as stocks, bonds, commodities, currencies, and crypto excite me. I truly enjoy communicating finance with an educational and creative style. I also believe in producing evidence-based narratives using empirical data to drive home points. Charts are one of the many tools I leverage to tell a story in a simple but engaging way. I focus on SEO and specific style guides when appropriate. My CFA and CMT backgrounds demonstrate prowess in investment management and my professional experience includes extensive public speaking and communication. Moreover, my extensive university teaching and professional trading experience provide useful skills. Past roles also include heavy use of Excel modeling and chart creation as well as PowerPoint.I am a contributor to The Dividend Freedom Tribe. I am a contributor to Topdown Charts.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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