Quest Diagnostics: Contributing to better healthcare decisions

Diagnostic medical tests guide physicians through the process of diagnosing diseases and measuring the progress of recovery. The leading U. S. provider of diagnostic testing services is a Lyndhurst, New Jersey outfit that performs personal health testing on more than 150 million patients a year. It was the first laboratory in the country to achieve ISO 9001 certification.

Quest Diagnostics (NYSE: DGX) provides diagnostic testing services to the healthcare industry. Offerings include routine blood tests, pap tests, urinalyses, pregnancy tests, asthma and allergy tests, gene-based tests and tests for drugs of abuse. It also provides anatomic pathology services, testing for clinical trials, and risk assessment services for the life insurance industry. Through its Nichols Institute Diagnostics subsidiary, the firm manufactures and markets diagnostic test kits and systems to hospitals, clinical laboratories and dialysis centers. Quest operates more than 2,000 sample collection centers, 30 primary labs and 150 rapid response labs throughout the US and in Mexico and the UK. The firm has testing contracts with such health insurers as Aetna (NYSE: AET) and Cigna (NYSE: CI).

The company surprised the Street earlier in the week, when it reported Q2 EPS of 73 cents and revenues of $1.64 billion. Analysts had been looking for 68 cents and $1.61 billion. Management also guided FY07 EPS to $2.80-2.95 ($2.80 consensus) and FY07 revenues to $6.6-6.7 billion ($6.61B consensus).

The news popped the shares out of an early July "cup" into the late July "handle" of a Cup & Handle formation. The price is now showing signs of completing the pattern with a bullish rise from the right-hand side of the "handle".

Brokers recommend the stock with two "strong buys", four "buys" and six "holds". Analysts see a 19% growth rate, through the next year. The DGX P/E ratio (19.55), PEG ratio (1.41), Price to Sales ratio (1.72), Price to Book ratio (3.39), Price to Cash Flow ratio (14.06), Price to Free Cash Flow ratio (19.71), Return on Assets (8.10%) and Return on Equity (18.53%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 70% of the outstanding shares. The stock is one of those used to calculate the S&P 500 Index. Over the past 52 weeks, it has traded between $47.98 and $64.69. A stop-loss of $48.75 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.