Medical Specialities company Quest Diagnostics is standing out today, surging to $158.99 and marking a 7.9% change. In comparison the S&P 500 moved only -0.0%.
DGX currently sits within range of its analyst target price of $159.91, which implies that its price may remain stable for the near future.
Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Quest Diagnostics has underperfomed the S&P 500 by 18.6%, moving 19.3%.
Quest Diagnostics Incorporated provides diagnostic testing and services in the United States and internationally. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Quest Diagnostics's trailing 12 month P/E ratio is 21.5, based on its trailing EPS of $7.41. The company has a forward P/E ratio of 16.4 according to its forward EPS of $9.68 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 26.07, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
DGX’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Quest Diagnostics, we obtain a PEG ratio of 2.48, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Quest Diagnostics's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,272,000 | 408,000 | 864,000 | -34.25 |
| 2022 | 1,718,000 | 404,000 | 1,314,000 | -28.2 |
| 2021 | 2,233,000 | 403,000 | 1,830,000 | 15.31 |
| 2020 | 2,005,000 | 418,000 | 1,587,000 | 88.26 |
| 2019 | 1,243,000 | 400,000 | 843,000 | 3.18 |
| 2018 | 1,200,000 | 383,000 | 817,000 |
- Average free cash flow: $1.21 Billion
- Average free cash flown growth rate: 0.8 %
- Coefficient of variability (the lower the better): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in DGX have received an annualized dividend yield of 2.0% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Quest Diagnostics has a P/B ratio of 2.67. This indicates that the market value of the company exceeds its book value by a factor of more than 2, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the third quarter of 2024.
Quest Diagnostics is by most measures undervalued because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with a flat trend. The stock has poor growth indicators because it has a an inflated PEG ratio and strong operating margins with a stable trend. We hope you enjoyed this overview of DGX's fundamentals.
