The field of modern healthcare has not existed for very long. Communities and civilizations always had wise men and women who were thought to be good in their treatment of particular diseases.
For example, ancient villages would have experienced wise men who could treat certain physical illnesses and wounds, while certain experienced women who were the predecessors to nurses and midwives were thought to possess the “secrets” to making childbirth less painful.
The act of using pure science and fact to make medical decisions and treat patients has become widespread only in the last few centuries. In the last few decades, science and the medical profession working together have devised literally thousands of new tests to help diagnose, treat and even predict medical ailments.
So in theory, companies that help perform these tests should be doing very well. In fact, that is why the stock price of Quest Diagnostics Inc (NYSE:DGX) has been on a steady upward trend in recent times, with lows last year below $60 but recent highs near $80.
Options trading advisory services are now analyzing Quest Diagnostics to understand whether it can continue to trend up, potentially driven by merger and acquisition activity.
Understanding the Business
Quest Diagnostics (DGX) is a horizontally integrated clinical testing solutions provider. This means that they provide diagnostic testing, information services, results management software and services to the healthcare profession.
Through its 45,000 strong workforce, the company is able to test, analyze, record and communicate tens of millions of laboratory tests every year across the United States. These tests are critical, as they allow healthcare professionals like doctors, surgeons and specialists to make the most accurate decisions about their patients that give them the best chance of the highest quality outcome.
Another revenue stream for Quest is the testing of new drugs, vaccines and medical devices for the medical research and scientific communities. Once again, these tests are crucial, as they allow new developments and breakthroughs to be thoroughly tested by an independent third party, which in turn helps get the required Food and Drug Administration (FDA) approval.
The company has a third division that markets its own health products and diagnostic tools, including those that helps hospitals test for infections and infectious diseases. Information services and software has also become a small but growing segment of the business in recent years.
Metrics and Measures
The focus of Quest Diagnostics (DGX) on several business areas in recent quarters has resulted in flat growth, but the most recently reported quarterly results showed options trading services that watch the company that growth had returned.
Since the same quarter one year ago, the revenue of the company increased by a solid 5.3%, which is a good result for an established company with a defensive, predictable set of services.
The margins for the company across the board remain strong, with the gross profit margin being 40.95%. The net profit margin that shows the dollars earned after all costs and taxes are paid is 3.31%, which is above the industry average, and shows that Quest Diagnostics is larger and more efficient than its peers.
For the total year, the company expects revenue growth of up to 3%, which is a good result compared to the flat growth of previous years. The business also generates strong cash flow, with over $850 million predicted to be generated in the next year. Quest is also investing for the future in better equipment, training and infrastructure, with capital expenditures of around $300 million expected.
The Investment Case
For Quest Diagnostics (DGX) the investment case is one of short term pain for long term gain. This is a strategy that looks to invest large amounts of money now, in return for industry leading returns in the future. It can be viewed a little like regular maintenance on the family car. It may cost some money today to get new wheels and change the oil, but in the future, the car will run better and save money on running costs.
That is the same reason that businesses spend money on capital expenditure like investments and research and development. There are rumors in the market that some potential buyers of Quest Diagnostics stock view the share price now as low, compared to what the company could be worth once they finish their investments. This was the reason for the huge stock price spike in recent weeks, as the market anticipated a takeover bid.
As a provider of essential services with a range of related revenue streams, Quest Diagnostics is an attractive company for options trading services to keep an eye on.
This is because the services that the business offers are essential, and difficult to replace or imitate, meaning that earnings are stable and predictable.
Quest Diagnostics (DGX) operates in the attractive healthcare industry, and should see increased demand for its services as the medical professions orders more tests to get better information to make their decisions with. In addition, the company is investing for the future, which should result in better earnings per share and profits in the future as they improve their business efficiency and reduce ongoing costs.
For investors who want to benefit from the price movements of stocks like Quest, it is essential to be a subscriber to a regular, high quality options trading newsletter like Financial Markets Wizard to get an advantage over the rest of the market.