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On Wednesday, Evercore ISI resumed its coverage on Quest Diagnostics (NYSE:DGX) stock assigning an In Line rating and establishing a price target of $165.00. This follows the completion of Quest Diagnostics' acquisition of LifeLabs on August 26, 2024.
The firm's analysis projects less than 1% revenue per requisition growth and sees modest accretion from the LifeLabs deal, estimating approximately $0.01 in the third quarter and $0.03 in the fourth quarter. They also anticipate contributions from the University Hospitals Outreach acquisition.
The firm expects COVID-related volumes and revenues to continue their decline, with roughly flat year-over-year base volume growth in the second half of the year. However, there is potential for a slight increase if current utilization trends persist.
Looking ahead to 2025 and beyond, Evercore ISI forecasts the base business will grow at a mid-single-digit rate, driven by around 1% revenue per requisition growth and low- to mid-single-digit volume growth.
The analysis points to slight margin expansion due to factors such as operating leverage, reduced impact from COVID, and a stable labor environment.
Additional accretion from LifeLabs is expected to incrementally add about $0.25 in 2025 and $0.12 in 2026. The firm also suggests that capital deployment could result in consistent high-single-digit earnings per share growth.
Despite the positive outlook and the potential for further upside from a more favorable utilization environment and the unlocking of health system opportunities, Evercore ISI views the current risk/reward profile of Quest Diagnostics' stock as balanced.
This is attributed to the stock's valuation already reflecting the improved fundamentals, having increased more than 12% quarter-to-date. With the stock trading at approximately 16 times the projected 2025 earnings, which is about a 2x premium to its five-year average price-to-earnings multiple, the firm considers this multiple reasonable compared to similar names in the Health Care Select Sector SPDR Fund (XLV) that are also experiencing high-single-digit EPS growth.
In other recent news, Quest Diagnostics has completed the acquisition of LifeLabs, a leader in the Canadian diagnostics field, a move expected to generate approximately $710 million in annual revenues for Quest. In addition, Quest is set to acquire select assets of the outreach laboratory services business from University Hospitals, Ohio, anticipated to finalize in the fourth quarter of 2024.
In financial updates, Quest reported a 2.5% increase in total revenue for the second quarter of 2024, reaching $2.99 billion. The company's full-year 2024 financial guidance anticipates revenues between $9.5 billion and $9.58 billion, with reported EPS ranging from $7.57 to $7.77.
Mizuho maintained an Outperform rating on Quest and raised the price target to $160 from $155 in response to these developments. Furthermore, Quest Diagnostics and BD (Becton, Dickinson and Company) have announced a global collaboration to develop flow cytometry-based companion diagnostics, aiming to enhance treatment selection for cancer patients and those with other diseases. These recent developments underscore Quest Diagnostics' commitment to growth and innovation in the healthcare diagnostics market.
InvestingPro Insights
As Quest Diagnostics (NYSE:DGX) integrates its recent acquisitions and looks ahead, investors may find additional context in the company's financial health and market performance. Quest's management has shown confidence in the company's prospects through aggressive share buybacks, and its commitment to shareholder returns is evident with a 13-year streak of rising dividends, which is supported by a dividend yield of 1.95% as of the latest data. Quest has maintained dividend payments for an impressive 21 consecutive years, underscoring its financial stability.
The company's valuation, with a Price/Earnings (P/E) ratio of 20.47, suggests a premium relative to near-term earnings growth, as indicated by a PEG ratio of 2.68. However, Quest's stock generally exhibits low price volatility, which might appeal to investors seeking stability. Despite a slight decline in revenue growth over the last twelve months, the company has maintained a strong gross profit margin of 33.01%. Additionally, Quest is trading near its 52-week high, reflecting a positive sentiment in the market.
For those looking to delve deeper into Quest Diagnostics' performance and future prospects, InvestingPro offers a wealth of additional insights, including 5 more InvestingPro Tips that can be accessed for a more comprehensive analysis. The InvestingPro Fair Value estimate is currently set at 152.0 USD, providing a benchmark for investors to consider against the stock's recent close at 153.6 USD.
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