Nine months after the U.S. Food and Drug Administration (FDA) gave Pfizer (PFE 0.23%) and BioNTech's (BNTX -0.16%) COVID vaccine Emergency Use Authorization last December, testing remains important to managing the spread of COVID. This is especially the case with the circulation of the more contagious and deadly delta variant.
That's why Quest Diagnostics (DGX 0.27%) recently hiked its revenue and adjusted diluted earnings per share guidance for this year. But is the stock still a buy based on the current valuation?
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Quest Diagnostics remains key to controlling COVID-19
Weeks after obliterating analysts' second-quarter earnings forecasts, Quest Diagnostics announced earlier this month that it was slightly raising its revenue guidance and moderately raising its adjusted diluted EPS outlook for this year.
Quest Diagnostics inched up its full-year revenue outlook from the previous $9.54-$9.79 billion to revised guidance of $9.84-$10.09 billion. In addition, Quest Diagnostics upped its adjusted diluted EPS forecast by 9% from $10.65-$11.35 to $11.65-$12.35.
Quest Diagnostics' new revenue guidance represents 4.2% to 6.9% growth over the $9.44 billion in sales reported last year. Quest Diagnostics' updated adjusted diluted EPS outlook for this year works out to a growth rate of 4.2% to 10.5% over the $11.18 in adjusted diluted EPS that was produced last year.
Quest Diagnostics said the increased guidance was caused by the recent surge in the delta variant, which led to an increase in its COVID-19 molecular testing (the tool that tests for active COVID-19 infection).
Since June, the delta variant has spiked from accounting for approximately 25% of cases to over 99%. This variant is more contagious, so it isn't too surprising that its increased prevalence has sent the seven-day daily average of COVID cases in the U.S. soaring from approximately 12,000 throughout most of June to 117,000 as of September 27.
And to demonstrate the conservative nature of the low end of Quest Diagnostics' new guidance, it's worth pointing out that this guidance assumes that 40,000 daily COVID-19 molecular tests will be performed in the second half of the year. This is well below Quest Diagnostics' 57,000 daily COVID-19 molecular test average in the second quarter, when the COVID-19 seven-day daily average peaked at around 71,000 in the U.S. on April 14. This was before the delta variant became the predominant variant in the U.S.
That's what leads me to believe that Quest Diagnostics will likely end up near the top end of its guidance and deliver high-single-digit or low-double-digit adjusted diluted EPS growth this year.
No one-trick pony
Given the emphasis on COVID-19 testing in the last year, investors should be forgiven if they get caught up in assuming that Quest Diagnostics is too dependent on COVID testing.
While COVID-19 testing services made up 25.4% of Quest Diagnostics' $5.27 billion in total first-half revenue this year, routine clinical testing services and gene-based testing services comprised two-thirds (66.6%) of Quest Diagnostics' total first-half revenue.
Routine clinical testing services are labs and tests that are typically ordered with a doctor visit, which include basic metabolic panel tests. Gene-based testing services include the hereditary breast cancer panel, which is used to help patients determine whether they have an increased risk of breast cancer compared to the general population. This helps to increase awareness and guide patients and doctors in making medical decisions.
Whenever COVID cases and therefore testing inevitably drop off, investors can rest assured that Quest Diagnostics will continue to innovate in its routine clinical testing services and gene-based testing services. This should allow the company to stay relevant in the years ahead.
The stock remains attractively valued
With steady operating fundamentals this year and a need for Quest Diagnostics' COVID-19 testing services for the foreseeable future, it appears as though Quest Diagnostics is being discounted by the market. To this point, Quest Diagnostics is trading at 9 times its trailing-12-month diluted EPS. This is approximately half of its 13-year median P/E ratio of 17.2, which implies that downside risk is limited.
Investors might have to wait for the market to reward Quest Diagnostics with a higher valuation multiple. In the meantime, they can receive a market-beating 1.6% dividend yield and rest assured that Quest Diagnostics' diverse suite of offerings will carry the business through the pandemic and beyond.
