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Quest Diagnostics’ History of Acquisitions is Paying Off

By Alex Carchidi - May 9, 2020 at 6:30AM

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The company’s powerful regional network of laboratories and its ever-expanding set of diagnostic products are locking in its long term growth potential.

Quest Diagnostics (DGX 0.41%) is a resilient healthcare company, even in the face of its recent furloughs, layoffs, and pay cuts prompted by the COVID-19 pandemic.

Boasting revenues of $7.7 billion in 2019, Quest's leadership has a long history of fruitful acquisitions, giving Quest a strong presence in many key regional U.S. markets, as well as a budding presence in international markets like India and Mexico. Thanks to its diligence with these acquisitions over the course of the last decade, Quest has access to nearly 90% of Americans with insurance.

Chess pieces on a chess board

Image source: Getty Images.

The scope of Quest's operations continues to broaden

Quest's wide reach has been a boon to the company's high-profile participation in COVID-19 diagnostic testing efforts. But careful investors should recognize that Quest's recent stint in the spotlight is unrelated to its sound strategy and effective growth-oriented business model.

Quest routinely acquires small firms in part or in whole to fortify its regional networks, making deals to purchase laboratory testing companies like Boyce & Bynum Pathology in 2019 and Cape Cod Healthcare in 2018, sometimes for as little as $35 million. With each acquisition, Quest deepens its integration with healthcare providers, paving the way for future selling opportunities within its newly expanded network.

Quest also has an appetite for acquisitions that contribute to its portfolio of diagnostics. In January, Quest ambitiously purchased Blueprint Genetics, a genome diagnostics company. Soon, Quest will be able to offer the diagnostic tests developed at Blueprint to all of its customers as new products. In the same vein, after acquiring Oxford Immunotec in late 2018, Quest onboarded two entirely new infectious disease diagnostic products to its already-impressive collection. These product-driven acquisitions enable Quest to bring new offerings to its customers in healthcare without incurring high in-house research and development expenditures.

Amidst new products, Quest deepens its market penetration

Because of the nature of its diagnostic testing business and relatively fixed demand in its major markets, Quest is unlikely to become a major growth stock as a result of expanding its COVID-19 testing capabilities. Doctors are unlikely to need significantly more diagnostic tests processed by Quest in the short term outside of those associated with COVID-19 testing because the incidence of typical medical disorders hasn't changed overnight. 

On a longer timescale, however, the market for medical laboratories will grow in keeping with the ever-increasing number of new diagnostic metrics discovered by basic medical science. To Quest's leadership, this paradigm of trickling new opportunities for growth is business as usual. 

Since the company's founding in 1967, its product offerings have expanded from a basic set of common diagnostic tests to a massive array of clinical tools, many of which are cutting-edge or designed for rare diseases. Thus, on the basis of its proven ability to consistently adopt new diagnostic products and deploy them at an ever-increasing scale, Quest's competitive position is extremely strong, meaning that it will capture a significant share of new testing markets as they develop. In the meantime, Quest will continue to seek growth by expanding the reach and capabilities of its laboratories.

Quest stock

Image Source: YCharts

Expect steady growth without any surprises

It's important to keep Quest's projected long term growth in context. While investors can reasonably expect Quest's stock to gain in value over the next five to 10 years, it's unclear whether the company's strategy of acquisitions will make its stock appreciate more rapidly than smaller and more specialized competitors. Likewise, while Quest is a reliable pick for investors seeking dividends, the company appears loath to take on large-scale new initiatives to penetrate new markets or explore new business models. Its 2.09% dividend yield is in line with the average S&P 500 stock, which also yields 2%.

Current holders of Quest stock should not give in to the urge to sell it if the shares take a beating after a poor earnings report or chaos ensues elsewhere in the healthcare sector or the broader market. For buyers looking to open a new position, look for market exuberance regarding Quest's role in COVID-19 testing to fade, but know that there isn't any guarantee of a major bargain anytime soon.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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