Quest Diagnostics Inc (DGX), Laboratory Corp. of America Holdings (LH): Why This Health Care Stock Is a Good Value

Furthermore, the management’s restructuring initiatives are being implemented. The targeted run-rate savings of $600 million by 2014 were declared to be “tracking very well” with plans. The really interesting news relates to its growth plans, however. A quick look at the chart above shows that its much smaller rival Bio-Reference Laboratories Inc (NASDAQ:BRLI). has achieved much faster growth rates. This is largely due to Bio-Reference’s focus on higher growth areas like esoteric testing, molecular diagnostics, and women’s health. It seems that Quest has been watching closely.

Indeed, the company has now focused on driving growth with its esoteric testing services, and it recently announced an extension of its relationship with women’s health company Hologic, Inc. (NASDAQ:HOLX). The deal’s main focus is on Hologic, Inc. (NASDAQ:HOLX)’s APTIMA product range — which includes tests for human papillomavirus, chlamydia, and gonorrhea — and allows Quest to offer new tests to its customers. Moreover, Quest is planning to release tests that create “a solution around BRCA1 and BRAC2.” These are genes whose mutations can be tested to try and ascertain a women’s susceptibility to breast cancer.

Where next for Quest Diagnostics?
Ultimately, its second-quarter results were disappointing from a top-line perspective. The investment case for the company remains in place, however. Its guidance for free cash flow generation is around $750 million, representing around 6.1% of its current enterprise value. Remember that this is in a year of raised capital expenditures due to the restructuring and investment.

Analysts have earnings rising 8.5% in 2014.  If Quest achieves its aim of $600 million in cost savings and getting the company back to 4% revenue growth rates, then its current valuation of 13.5 times earnings estimates for 2013 will start to look cheap. It’s an interesting value proposition.

The article Why This Health Care Stock Is a Good Value originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has a position in Quest Diagnostics. The Motley Fool recommends Laboratory (NYSE:LH) of America and Quest Diagnostics. The Motley Fool owns shares of Bio-Reference Laboratories. 

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