Quest Diagnostics: Valuation Looks Good As Covid Testing Demand Tapers (NYSE:DGX)

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

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’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

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

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.