Better Buy: Laboratory Corp Vs. Quest Diagnostics

LabCorp (LH) and Quest Diagnostics (DGX) face off in the competitive lab services market. Since warmer weather boosts lab services volume, let's see if one is a better buy than the other.

Apr 3, 2014 at 10:58PM

Lab services may not be the first investment idea you consider when thinking about warm weather plays, but maybe it should be. Major lab services plays Laboratory Corp (NYSE:LH) and Quest Diagnostics (NYSE:DGX) both remind investors in their annual reports that testing volume tends to slide through the holidays and pick up in spring. Given that backdrop, is one of these two lab giants a better buy?

LH Chart

LH data by YCharts

Debating sales
While spending on lab tests on fluids like blood or tissues makes up just 3% of total health-care spending, lab results influence 60% to 70% of all physician decisions. That means lab testing is, and is likely to remain, a major driver behind how primary-care doctors and specialists decide to treat -- and prevent -- a variety of diseases, including heart disease and cancer.

Since 8,000 baby boomers are turning 65 every day,  and chronic illness is more common among older people, it stands to reason that Lab Corp and Quest's sales will both track higher over the long haul. Given that both companies are mature and have widespread client footprints, let's see how investors are currently valuing them relative to sales.

Of the two, Lab Corp is the most expensive in terms of the price investors are willing to pay for every dollar of revenue. Investors are currently paying 1.6 times sales for shares, while they're paying just 1.3 times revenue for shares in Quest.

However, that's not shocking given investors have traditionally awarded Lab Corp a premium valuation. It should also be noted that the ratio is relatively low on both compared to where it's been in the past.

LH PS Ratio (TTM) Chart

LH PS Ratio (TTM) data by YCharts

Debating earnings
Lab Corp's better margin is likely one reason investors have been willing to pay more for its shares than Quest's. Lab Corp's operating margin is 17.4%, while Quest's is 16.8%. That suggests Lab Corp is better positioned to drop more of the jump in seasonal volume to its bottom line.

As you'd expect, that profit-friendly advantage has investors paying more for Lab Corp's earnings than for Quest's. Lab Corp is trading at 14.4 times future earnings, which is slightly higher than Quest's 14 P/E ratio. Investors should also know that trailing 12-month P/E ratios aren't overly pricey at either company.

LH PE Ratio (TTM) Chart

LH P/E Ratio (TTM) data by YCharts

However, P/E ratios only tell a little bit of the story. Analysts have cut their estimates for Lab Corp's 2015 earnings from $7.2 to $7.1 per share during the past 90 days, and while that's not a good thing, the drop is far less than the the $4.60 to $4.32 cut to Quest's expected earnings.

Fool-worthy final thoughts
In the debate over which is a better buy, these two appear pretty equally matched; however, Quest may have an edge given its shares cheaper to sales, and it has a slightly lower forward P/E ratio.

That may mean Quest is a better bet for value investors than Lab Corp, especially considering that, while Lab Corp doesn't pay a dividend, Quest does. Granted, Quest's forward dividend yield isn't as high as the big pharmaceutical companies, but at 2.2%, it's still healthy.

Investors should also know that short sellers have amassed an arguably aggressive short position in Quest that totals 13 days worth of average daily trading volume. Given Quest's valuation, any good news could mean that Quest's shares head higher more quickly than Lab Corp as short sellers cover. 

Lab services may be a good long-term bet, but Buffett would like these more
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Quest Diagnostics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers