Quest Diagnostics
Undervalued acquirer with steady compounding
This week's blog post focuses only on one company: Quest Diagnostics. Before we study the name, we need to examine Donald Trump’s recent actions—because, for better or worse, tracking his every move has become a defining part of our existence.
An entente?
Donald Trump has settled into a rhythm. Every weekend, he flies to Mar-a-Lago to play golf and socialize, then he flies back to Washington Sunday evening, and on the plane, he holds a short presser in a narrow door, where he says a lot of weird stuff, having one of his sycophants staring eerily in the background. During “the work week”, he says more strange things to the press corps, which makes absolutely no sense from an economic standpoint, and then its Friday again, and he’s on his way back to Florida for some more golf.
Meanwhile, the market flops around, and somehow, by the flip of a coin, the Trump administration has stumbled into a trade war with China. It’s a war the U.S. can’t win, or China, for that matter. The two economies are too interdependent and interwoven, so there is only costs to accumulate by pursuing such a conflict over time. When both parties realize they can’t win, they will likely search for off-ramps.
Recent moves have underscored the risks of continued confrontation for both parties, such as China’s targeted export controls on rare earths and the Trump administration’s orders to review and bolster domestic mineral production. In this context, the prospect for an entente—a limited, face-saving agreement to stabilize critical supply chains and prevent further escalation—appears increasingly likely. While China has signalled a willingness to negotiate given that talks are conducted in a respectful atmosphere without public humilation, the Trump administration has expressed a willingness to pull back if the American president receives a “beautiful” phone call from Xi Jinping.
Hence, below the headlines messaging between the two countries suggest they will come to the negotiating table and reach an agreement in the next few months. This potential agreement is unlikely to be a deal that ends the economic and military rivalry between them. So, while deep-seated rivalry and mistrust will persist, the urgent need to maintain stability provides a compelling impetus for a settlement. The contours of such an entente will likely involve both countries agreeing to gradually reduce or suspend punitive tariffs, restoring more normal trade flows. Whether the deal will address key American concerns are unclear. It is also unclear whether the two countries will establish ongoing dialogue and dispute resolution mechanisms. Instead, the two countries are more likely to search for ways to reduce their dependency on each other, where the U.S. tries to diversify its supply chains away from China, and China promoting new thrusts of exports away from the American market.
Should the trade war prove short-lived, there is a strong possibility that markets have already bottomed out, allowing investors to shift their focus beyond any potential recession in late 2025 and look ahead to renewed growth. In short, resolving the Trump tariffs would reduce market uncertainty, restore investor confidence, and support economic stability. This clarity would encourage business investment and hiring, helping markets recover and look beyond short-term risks toward stronger growth prospects in 2026, ultimately benefiting both the stock market and investors.
What I do in the market these days
The market may have hit a bottom on April 8th. Despite this belief, my behavior remains the same. I have a balanced approach. On one hand, I am searching for high beta names that might spring back to life as soon as animal spirits return to the market. On the other hand, I continue to add to more defensive companies that might weather all kinds of markets. Last week, I raised my stake in Amgen, one of my top picks this year.
And now we dive into Quest Diagnostics, which is in a recession proof business.
Quest: a short bio
Quest Diagnostics (DGX) is a New York company founded in 1967. Today, it is a global leader in diagnostic information services, providing laboratory testing, genetic and molecular diagnostics, health data analytics, and wellness programs to healthcare providers, patients, employers, and insurers.
DGX’s main market is the United States, where it operates a vast network of laboratories and patient service centers. Internationally, it also has operations and significant presence in Puerto Rico, Mexico, Brazil, Canada (following the acquisition of LifeLabs), India, and Ireland. Its products and services are utilized by customers across six continents, and the company serves hospitals and laboratories in over 50 countries each year.
Quest pays a dividend with a forward yield of approximately 2% and has a market capitalization of $18.18 Bil.
I know this business
In the early 1990s, I worked in Norway’s largest private medical laboratory, so I have firsthand knowledge about the field. The analog backbone of the business remains the same after all these years, even though much have changed, mostly due to digitalization and robotics.
As shown below, test samples—such as blood, urine, and stool—are collected at medical facilities and transported to in situ Quest laboratories. In the lab, these samples are processed efficiently, much like on a factory line, before being analyzed by laboratory technicians and scientists. Finally, hospitals, doctors, and patients receive the test results and are billed accordingly.
Growth projections
Quest’s growth has four drivers. As the population ages and the prevalence of chronic and complex diseases increases, the demand for diagnostic testing continues to rise. At the same time, ongoing innovation in laboratory diagnostics is making it possible to conduct more advanced and comprehensive tests, especially in areas such as oncology, cardiometabolic health, women’s health, brain health, and autoimmune disorders. Consumers are also becoming more health conscious, which is driving greater interest in proactive health management and consumer-initiated testing. Finally, the adoption of artificial intelligence, automation, and robotics are reducing costs, boosting productivity, accelerating innovation in diagnostics, and improving test accuracy.
DGX is guiding 9% revenue growth in 2025, with a long-term outlook of 4–5% organic revenue CAGR and 7–9% adjusted EPS CAGR beyond this year. If the company achieves its 2025 guidance, annual sales will reach $10.7–$10.85 billion—matching the record revenues seen in 2021 at the height of pandemic-driven COVID-19 testing demand. This remarkable rebound, achieved so fast, underscores the underlying growth potential of Quest’s core business. It demonstrates how DGX is positioned to deliver sustained, above-market growth.
While organic growth factors are key, Quest's disciplined acquisition strategy significantly fuels its expansion, adding strategic assets and driving revenue.
Accretive acquisitons
DGX is expected to spend 2025 integrating its recent acquisitions. Over the past year, Quest has unlocked significant growth opportunities by acquiring LifeLabs in Canada, and certain laboratory assets from Spectra Laboratories and Allina Health.
LifeLabs give DGX a foot-in-the-door in the large Canadian market. Quest plans to leverage its expertise and resources to accelerate LifeLabs’ growth, drive operational efficiencies, and expand service offerings, particularly in digital health and specialized testing. The acquisition is projected to contribute over $700 million in annual revenue—nearly 7% of Quest’s total sales. While the deal may be slightly dilutive to GAAP earnings per share initially due to acquisition-related costs, DGX anticipates that LifeLabs will become substantially accretive to the bottom line as these costs subside.
In the same vein, the Spectra acquisition opens the door to the market of chronic kidney disease testing since Spectra’s capabilities are concentrated in renal-specific laboratory testing and dialysis-related water testing, serving patients with end-stage kidney disease. The Alina Health acquisition gives Quest a stronger foothold in Wisconsin and Minesota, solidifying the company’s wide moat in the American market.
Undervaluation
Quest Diagnostics is slightly undervalued. Using a discount rate of 9,5%, I calculate a fair value estimate of $180 per share, while the stock price takes Easter holiday at $163,80.
Should you buy DGX here?
Yes, you can, given that you have cash available. With strong growth projections, strategic acquisitions boosting revenue, and the stock currently undervalued, Quest Diagnostics presents a compelling buy opportunity for long-term gains in an uncertain period for the global economy.
Disclaimer: Important Information for Retail Investors
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