Embarking on a Profitable Quest

Quest Diagnostics (NYSE: DGX  ) has been busy lately, snapping up a pair of smaller players and seeing its share price recover to near 52-week highs. Let's take a look at what these acquisitions mean for Quest, and if the medical diagnostics company should have a place in your portfolio or a spot on your watchlist.

In late February, Quest picked up privately held Athena Diagnostics for $740 million, paying a little under seven times Athena's revenue in the process. For Quest, this results in one less competitor and a 12-percentage-point boost in market share within the $750 million neurology testing market, in which it competes with LabCorp (NYSE: LH  ) . Also attractive are Athena's higher margins and its relatively strong moat, thanks to patent protection on three-quarters of its revenue as well as a favorable payer mix. Synergy may be a dirty word, but Athena is a bolt-on acquisition, and Quest's marketing force should be able to grow combined revenue starting next year.

Unlike the Athena pickup, Quest's move on Celera (Nasdaq: CRA  ) last week likely won't pay dividends for a while. So what did $671 million get Quest? First off, try $327 million in cash. Quest's $8-a-share offer represented a 28% premium, but Celera's cash still represented half of the per-share value. This deal is about Celera's proprietary genetic testing, used by clients UnitedHealth (NYSE: UNH  ) and Aetna (NYSE: AET  ) , along with expanding Quest's diagnostic pipeline courtesy of 100 approved or pending patents. All things considered, Celera's focus on heart disease and cancer were likely attractive factors as well.

Quest seems to be doing a good job balancing short-term gains with long-term growth. Athena is the near-term catalyst, while the addition and development of Celera's patents should strengthen Quest's position down the road. Utilization trends are rumored to be improving, likely giving share prices a near-term boost, but looming reimbursement reductions are sitting like a dark gray cloud on the horizon. I like this company's prospects, but my immediate concern is that share prices have climbed more than 6% in just the past week. Investors may want to keep Quest Diagnostics on their watchlist and see if a better entry point reveals itself.