On Monday, Jefferies initiated coverage on Quest Diagnostics (NYSE:DGX) with a Buy rating, setting a price target of $185.00. The healthcare diagnostics company, currently trading at $158.20 and near its 52-week high of $165.32, has shown promising momentum with a year-to-date return of 16.58%. While Quest Diagnostics has not yet returned to its peak revenue levels from the height of the COVID-19 pandemic, the company's year-to-date performance indicates a clear trajectory for surpassing that benchmark in the near future.
According to the firm, Quest Diagnostics has shown positive signs through its ability to set prices and secure new contracts, such as those with Elevance and Sentara Health. These developments are expected to contribute to a sustained mid-single-digit revenue growth through 2026, building on its current revenue growth of 2.6%.
However, the firm also pointed out that execution risks exist, particularly as the company's operating profit margin improvement guidance is lower compared to its peers.
Additionally, Quest's growth strategy includes mergers and acquisitions, which presents a significant challenge as it aims for over 2% growth through acquisitions by around 2026. InvestingPro analysis reveals that the company maintains a strong financial health score, with particularly high marks in profitability and price momentum metrics.
The analysis by Jefferies highlighted that Quest Diagnostics' stock is trading at approximately 11.5 times its earnings before interest, taxes, depreciation, and amortization (EBITDA), which is around two turns higher than its 10-year average multiple. Despite this, the stock's discount compared to the S&P 500 is roughly 10% wider than its average.
Jefferies believes there is potential for an upward re-rating of the stock. This optimism is based on several factors, including anticipated stronger pricing due to ongoing delays with the Protecting Access to Medicare Act (PAMA) and improvements in the company's service mix.
Furthermore, the firm anticipates that Quest Diagnostics will continue to expand regionally through new contract wins and the acquisition of LifeLabs. Growth prospects in the oncology sector, particularly with the Haystack project, and further acquisitions in the outreach lab space are expected to contribute to the industry's consolidation.
In other recent news, Quest Diagnostics reported robust third-quarter growth, with revenues reaching $2.49 billion, an 8.5% increase year-over-year. This growth was attributed to organic expansion and strategic acquisitions, including LifeLabs. Despite weather disruptions and operational challenges, the company provided upbeat full-year 2024 guidance, projecting revenues between $9.8 billion and $9.85 billion and adjusted earnings per share (EPS) of $8.85 to $8.95.
Baird, a financial services firm, upgraded Quest Diagnostics' stock from Neutral to Outperform, reflecting a positive outlook on the healthcare sector's momentum and several favorable trends. Similarly, Leerink Partners increased their price target on Quest Diagnostics to $165 from $160, reflecting a valuation of approximately 17 times the firm's calendar year 2025 earnings per share estimate.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.