Is Quest Diagnostics (DGX) Pricing Look Attractive After Recent DCF And P/E Checks

• If you are wondering whether Quest Diagnostics at around US$178 per share represents good value today, looking closely at what you are paying for each dollar of its business can be a useful next step.
• The stock has recently shown mixed returns, with a 2.7% gain over the last 7 days, a 2.0% decline over the last 30 days, and returns of 2.5% year to date, 17.8% over 1 year, 23.8% over 3 years, and 56.6% over 5 years.
• Recent coverage of Quest Diagnostics has focused on its role in diagnostic testing and its position in the US healthcare sector, giving investors fresh context on how the company fits into long term demand for lab services. These developments have helped keep attention on how much investors are currently prepared to pay for that position.
• On our checks, Quest Diagnostics scores 5/6 for valuation. This suggests it screens as undervalued on most of the metrics assessed. Next, we will look at how different valuation methods assess the stock and then finish with a broader way to think about its value beyond the numbers alone.

Quest Diagnostics delivered 17.8% returns over the last year. See how this stacks up to the rest of the Healthcare industry.

Approach 1: Quest Diagnostics Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a company could be worth by projecting its future cash flows and then discounting those cash flows back to today’s dollars.

For Quest Diagnostics, the model used is a 2 Stage Free Cash Flow to Equity approach, based on last twelve months free cash flow of about $1.39b. Analyst projections and extrapolated estimates in the source material suggest annual free cash flow remaining around the $1.1b range over the next decade, with Simply Wall St extending forecasts beyond the period covered by analysts.

When those projected cash flows are discounted back and aggregated, the DCF model in the source material points to an estimated intrinsic value of about $224.73 per share. Compared with the recent share price of around $178 in that analysis, this implies a discount of roughly 20.7%, which indicates the stock screens as undervalued on this cash flow based view within that specific model.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Quest Diagnostics is undervalued by 20.7%. Track this in your watchlist or portfolio, or discover 879 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Quest Diagnostics.

Approach 2: Quest Diagnostics Price vs Earnings

For a profitable company like Quest Diagnostics, the P/E ratio is a useful way to think about what you are paying for each dollar of current earnings. A higher or lower P/E often reflects what the market expects for future growth and how much risk investors see in those earnings.

Quest Diagnostics currently trades on a P/E of about 20.6x. That sits below the Healthcare industry average of roughly 22.9x and well below the peer group average of around 32.7x, so the stock is valued at a lower earnings multiple than many similar names. Simply Wall St also calculates a proprietary “Fair Ratio” of 27.1x for Quest Diagnostics. This represents the P/E level it estimates would be appropriate given factors like earnings growth, profit margins, industry, market cap and specific risks.

This Fair Ratio aims to be a more tailored yardstick than a simple industry or peer comparison because it adjusts for the company’s own profile rather than assuming all Healthcare stocks deserve the same multiple. With the current P/E of 20.6x below the Fair Ratio of 27.1x, the shares screen as cheaper than this model suggests might be typical.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1443 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Quest Diagnostics Narrative

Earlier we mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you put your own story about Quest Diagnostics into numbers by linking what you think about its test volumes, acquisitions, margins and long term role in healthcare to a forecast for revenue, earnings and a fair value. You can then compare that fair value with the current price to decide if the stock looks attractive or expensive, with the whole view updating as new news or earnings arrive. For example, one investor on the Community page might build a bullish Quest Diagnostics Narrative that leans on expectations for higher test volumes, benefits from automation and data analytics, accretive deals like LifeLabs, pipeline tests such as Haystack MRD and a fair value closer to US$200 per share. Another investor might focus more on reimbursement and payer mix risks, wage and cost pressures and competition from new testing channels, resulting in a Narrative closer to US$166. You can see both side by side and decide which better fits your own expectations.

Do you think there's more to the story for Quest Diagnostics? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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