Last week, New Jersey-based Quest Diagnostics (NYSE:DGX) reported first-quarter earnings that -- surprise, surprise -- met analysts' estimates. Quarterly earnings per diluted share grew from $1.08 a year ago to $1.28, and that means full-year results look to be on track to meet 2005 EPS targets of $5.45 to $5.55. The stock currently trades at around $105.
This news isn't remarkable in itself, given that Quest has been meeting and exceeding earnings estimates for years. What is notable is that Quest is one of the rare companies that consistently grows revenues and earnings for shareholders while pursuing rule-breaking research in gene-based treatments and diagnostic methods. This combination puts Quest at the crossroads of value and growth -- growth within the perspective of a large, stable, company, that is.
Quest came to my attention because it got flagged by two very different screens I looked at here at Fool HQ. The first was a Rule Breakers screen, which looks for companies that shed the mold and have potential to take off in the future. Many of these companies are not yet profitable but are involved in groundbreaking research that could change the world. These include everything from nanotechnology companies like FEI (NASDAQ:FEIC) to biotechnology companies like Human Genome Sciences (NASDAQ:HGSI).
The other screen that flagged Quest for me was a value screen I run. This screen looks for companies that do not trade over the counter; that generate free cash flow; that have grown total cash flow, EPS, and net income by at least 12% over the past seven years; and that have at least 20% insider ownership. Other companies that appeared on this screen recently were venerable ones such as Berkshire Hathaway and Motley Fool Hidden Gems recommendations such as shoemaker Deckers (NASDAQ:DECK) and Fresh Del Monte Produce (NYSE:FDP). The screen also pulled a number of stocks I already own, including Apollo Group (NASDAQ:APOL) and Danaher (NYSE:DHR). For me, that's a sign that the screen is still finding companies I might like to buy -- and that the companies I've bought are still on my A-list.
Like Human Genome Sciences, Quest is developing gene-based treatments and cures for disease. Through its genomics research, the company expects to produce more sophisticated and specialized diagnostics tests. In 2004, gene-based testing already generated $600 million in revenue for Quest, and the company expects that area to continue to grow at an annual 10% clip. This is where its rule-breaking potential lies. But unlike Human Genome Sciences, Quest is decidedly profitable -- and that's where its value potential lies.
Most important, in this case, is that interplay of value and growth. You see, Quest is a stable boat, deriving a workhorse 82% of its $5 billion-plus in yearly revenues from routine testing. And while a hefty $11 billion company won't be stepping aboard the next moon rocket, these gene-based applications give it the potential to become the equivalent of an offensive lineman who runs like a halfback.
And run it has. While Human Genome Sciences lost $1.87 per share last year and is down more than 60% over the past five years to around $10 these days, Quest earned $4.69 per share and is up 370% over the same period.
Sure, Quest's market cap is almost 10 times larger than Human Genome's, so this is a bit like comparing one apple with an orange-tree orchard. But when I see the same company pop up on two very different screens, it raises a flag in my mind to do more research. Companies that double up like that could be the cure for what ails your portfolio.
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Tim Hanson hopes he doesn't need a good diagnosis for a long while. He owns shares of Apollo Group and Danaher. The Motley Fool has a disclosure policy.
