Bull Of The Day: Quest Diagnostics (DGX)
Quest Diagnostics (DGX) has been one of the coronavirus heroes, having performed 14.4 million COVID-19 diagnostics tests and 3.6 million antibody tests (as of September 14th). At the same time, Quest was provided with a strong tailwind from the global pandemic as the clinical-testing duopoly - with LabCorp (LH) - gets flooded with demand for the much needed COVID-19 screens.
Despite the precipitous surge in this unforeseen testing demand, Quest had seen a significant disruption in its non-COVID related diagnostics. This disruption is beginning to fade as its broad portfolio of testing capabilities begins to pick back up considerably faster than anticipated.
On September 10th, Quest’s management team sizably increased its full-year revenue and EPS outlook for 2020 (again), and analysts have followed suit. Quest has raised its 2020 sales guidance by 10% from pre-COVID projections. With the business looking more potent than ever, DGX is propelled to a Zacks Rank #1 (Strong Buy).
Diagnostic Outlook
Quest upwardly revised its 2020 revenue guidance to $8.4 - $8.8 million (from $8 - $8.6 million), which would represent record annual sales with year-over-year growth of 8.7 – 13.9%. Management similarly adjusted EPS from $6.60 - $8.60 to $7.50 - $9.00, which would blow past earnings of any prior year. Analysts have set their EPS and sales estimates towards the highest end of what tends to be conservative guidance.
2020 is undoubtedly going to be a banner year for Quest. The firm is currently conducting 20,000 COVID diagnostic tests and 20,000 antibody tests daily, with a capacity of 200,000 daily (for each) if we were to see a pandemic resurgence this fall/winter. The consistent COVID testing and the substantial uptick in normal operations will be the impetus that pushes this stock to record levels.
DGX’s short-term price action will be dictated by its ability to navigate the COVID-crisis and its testing needs, while its long-term trajectory remains strong.
You may be thinking that the coronavirus testing tailwind is only temporary, but many analysts are predicting that the COVID-9 diagnostic market will continue to grow for years to come. The continued COVID testing uptick combined with the consistent organic growth the company had illustrated for years prior to the pandemic, positions this stock well for the next decade of returns.
Valuation, Levels, & Price Targets
DGX is currently trading at a forward P/E of 13.1x, representing a sizable discount to its 5 years rolling average of 15.6x. This relative discount, combined with its consistent 2% dividend yield, gives me confidence in the relative safety of a long-term position in this stock.
These shares have seen some short-term volatility after failing to break through the $118 level on Monday. DGX is now headed down towards its 200-day moving average around $109, which I believe will represent a strong support level for these shares to bounce off (circled in the TradingView chart below).
Despite DGX’s beta being north of 1, these shares have not been correlated with the broader market amid the pandemic trade. I like this stock as volatility begins to pick up again because it provides a marginal hedge to your portfolio.
9 out of 14 analysts are calling DGX a buy today. Many analysts have raised their price targets in the wake of management’s considerable upside revisions to 2020 guidance. The average price target sits at $133 per share, representing a roughly 20% upside from where it is trading today.
Final Thoughts
DGX is a good play for the rest of this crazy and unpredictable year. One thing we know for sure is that people will continue to be tested for COVID-19 and its antibodies, through the remainder of the year at least. If a reliable vaccine is discovered and the eventual need for this test recedes, Quest still has its massive portfolio of organically expanding clinical tests to leverage.
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