quest diagnostics incorporated (nyse: dgx)...company p/e quest diagnostics inc 13.36 laboratory crp...
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M c I n t i r e I n v e s t m e n t I n s t i t u t e 1
McIntire Investment Institute At the University of Virginia
Quest Diagnostics Incorporated
(NYSE: DGX)
Prepared by Ting-Yu Hu| 17 March 2011
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Founded in 1969
Headquartered in Madison, NJ
Clinical laboratory services
2,000 Patient Service Centers. 33+ regional laboratories
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Company Overview
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1-Year Stock Chart
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Share Price: 54.09 Market capitalization: 9.26B
P/E: 13.36 EPS: 4.05
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52-week range: 40.80 - 60.28
Average volume: 1,866,140 Total Cash: 449.30M Total Debt: 2.99B
Stock Summary
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DGX is a Long
1. Industry Leader/Brand Recognition
2. Significant Growth Opportunities
3. Strong Financial Position/Cash Flow to Fuel Growth
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• Industry segment leader • Competition is limited:
– LabCorp is main competitor – Local clinical labs – Local hospital outreach
• National brand recognition
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Quest is an Industry Leader
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Clinical Labs Comprise a Major Portion of the Market
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Quest Diagnostics is a Clear Industry Segment Leader
Company FY2010 FY2009 % Change
QUEST DIAGNOSTICS INC 7.37B 7.46B -1.21
LABORATORY CRP OF AMERICA 5.00B 4.69B 6.61
BIO-REFERENCE LABS INC 458.02M 362.65M 26.29 MEDTOX SCIENTIFIC INC 97.11M 84.108M 15.46 ENZO BIOCHEM INC 97.082M 89.572M 8.38 PSYCHEMEDICS CORP 13.02M 16.955M -23.21 MYRIAD GENETICS INC 362.648M 326.527M 11.06 ORCHID CELLMARK INC 59.062M 57.595M 2.55
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So Why is Revenue Falling?
• Industry-wide decrease in testing due to recession/external factors – Decrease in workplace drug-
testing – Visits to physician offices
decreased
• Increased competition
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Electronic health records (EHR)
• Specialized diagnostic tests
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Significant Growth Opportunities
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Quest’s IT Services Account for a Minority of Revenue
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EHR Usage is Government Incentivized
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• “Meaningful use” clause in HITech Act 2009 • $44,000 incentive per physician • 2012 deadline
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Quest Stands out from its Competitors
• Existing national physician base • Modular, integrated services • Accessibility (Smartphone, iPad, computer) • Differentiation
– Free trial offer – Marketing
• User friendly UI
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“EHRs don’t really compete on technology but on sales force, service, a little on UI, but
more on solutions and integrations. Most EHRs are local businesses and therefore compete in the same way as pizza shops
and restaurants – service.”
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Keith Klein, MD, FACP, FASN Cedars-Sinai Medical Center David Geffen School of Medicine, UCLA 16
“…Their interface is exquisitely and brilliantly designed…no learning curve at all. The programmers really understood what the doctors wanted; they really understood the work flow, the limitations of being in an exam room talking to a patient.…”
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Growth Focused in Specialized Testing Needs
• Esoteric tests • Anatomical pathology tests • Gene-based tests
– Insurers support usage
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Industry driven by inorganic growth
• Internal tests take time to develop
• FDA approval necessary for new test procedures
• Quest is making the right acquisitions to stay in the lead
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Strong Financial Position/Cash on Hand to Fuel Growth
• Cash on hand to finance acquisitions
• Strong cash flow – Easily collectible
accounts receivable
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Leftover Cash Flow Return Value to Shareholders
• Consistent dividends – $0.40/year
• Significant stock repurchases by management
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
Comparables Analysis Shows DGX is Undervalued
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Company P/E QUEST DIAGNOSTICS INC 13.36
LABORATORY CRP OF AMER 16.71
BIO-REFERENCE LABS INC 21.2
PSYCHEMEDICS CORP 17.65
MYRIAD GENETICS INC 13.45
Average P/E without DGX: 17.25 Implied Price for DGX: 69.87
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Quest is just a clinical testing/reference laboratory
• Truth: Quest has a growing healthcare information technology business
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Misperceptions
“…every Quest customer already has their EHR. All they have to do is flip
the virtual switch and their current customers can start using their
EHR.”
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• Local hospital outreach programs will push Quest out
• Truth: Quest’s economies of scale allow it to compete effectively
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Misperceptions
“Even if you have a smaller local lab, many of them will even use Quest…because Quest's
costs are so much lower for certain tests because they do them in a high volume...a small local lab might not have the volume and so the
cost is too high to do just a small number.”
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Catalyst
• Widespread physician adoption of EHR
• Diagnostic testing volume increases
• Quest wins contracts with new managed care clients
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Catalysts
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Risks
Macro trend risk • Physician patient volume remains flat
Business Risk • Hospital outreach programs gain
market share • LabCorp acquires Quest’s managed
care contracts • Quest fails to promote Care360
Political Risk • Medicare incentives eliminated
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Recommendation: Initiate a 3% Position at Current Prices
Growth Opportunity
Cash for Acquisitions
Compelling Long
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McIntire Investment Institute At the University of Virginia
Quest Diagnostics Incorporated
(NYSE: DGX)
Prepared by Ting-Yu Hu| 17 March 2011
M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR
• John Lynn- editor of the nationally renowned blog EMRandHIPPA.com (over 800 articles viewed over 2.4 million times). Former EHR Manager for the University of Nevada's Health and Counseling Center.
• Shahid N. Shah- healthcare IT software analyst CTO for CareFusion, CTO of two Electronic Medical Records (EMR) companies, a Chief Systems Architect at American Red Cross
• John Zimmerman, MD 28