Interesting Options in Medical Labs and Research
Recommendation
Quest Diagnostics, Inc. appears to be the most timely opportunity for investors in this industry. The company is the industry leader and has the largest market cap among Medical Labs and Research companies. Furthermore, recent trading action in DGX suggests a possible buyout or that it is in play. Despite a low overall fair value, given the recent events concerning DGX take out value should be the key valuation. If investors use take out valuation, DGX should go private somewhere between $75 and $85.
National Dentex Corporation and Alliance Imaging, Inc. are also attractive opportunities for investment within this industry. Each trades at a significant discount to fair value and both companies offer an unlikelihood of financial distress.
Valuation Comparison
Table 1: Equity Valuations for Selected Companies in the Medical Labs and Research Analysis Industry
Table one shows that National Dentex and Alliance Imaging have the best showing in terms of valuation. Each trades at about a 40% discount to fair value, which certainly is compelling, but neither one is the most attractive opportunity in the industry.
The most attractive issue is Quest Diagnostic, Inc. Investors will probably ask why, considering the illustration above says DGX is only 10% undervalued. The reason is that the stock was up $3.43 today, with heavy option buying for July $55 and $60 calls. This leads some knowledgeable investors to believe that DGX could be in play. According to our take out value calculations above the stock should fetch a significant premium if gobbled up by private equity. Follow these links for an interesting take on trading action in DGX for July 5, 2007:
Reuters: Quest Diagnostics Options, Shrs up on Buyout Talk
Forbes: Quest Shares Spike Amid Takeover Rumors
Stock Universe
Table 2: Undervalued universe for the Medical Labs and Research Analysis Industry
Only 25% of the companies in this industry made it through our analysis. Again, investors should focus their time on trying to understand the opportunity in Quest Diagnostics, Inc. since it seems to be the most likely to advance sooner rather than later.
Valuation Calculations
Table 3: Take Out Valuations
Table three offers investors strong implications given the current private equity climate. Quest Diagnostics is the industry leader which puts it in a strong economic position. DGX’s large market share and mediocre management metrics make for an attractive opportunity for private equity. These characteristics suggest that the 33% discount in terms of take out value could be realized in the near term. If DGX is taken private, then look for other companies such as National Dentex and Alliance Imaging to possibly go private as well.
Table 4: Relative Valuation
Exhibit number four shows Quest to be overvalued on both a Price to Earnings and Price to Book Value basis, yet undervalued on a Price to Sales basis. These facts result in a disappointing showing, but National Dentex and Aeterna Zentaris both perform well under the relative analysis test. The question is can the latter two companies sustain their strong earnings streams.
Table 5: Earnings Power and Reproduction Values
Table five further illustrates why Quest is the superior investment despite a poor showing on a Price to Earnings and Price to Book Value basis. DGX has an earnings power value which ranges from $65 to $105. Both prices seem to be at the extreme, which further supports a $75 to $85 target. Reproduction values for DGX also exhibit a vast range with a midpoint of $43. Despite such large valuation ranges, shares seem attractive.
In the end, each company that is profiled in this comparative valuation analysis has some sort of short-coming. National Dentex Corp. and Alliance Imaging, Inc. look attractive from an overall perspective given their 40% - plus discount to fair value. Aeterna Zentaris proves to be quite speculative given its negative take out values and poor earnings power value. Finally, Quest Diagnostics despite a poor overall showing seems to be the most attractive issue. Quest performs well on both take out and earnings power values, which bodes well for any investors that believe the company may be taken private.
*The author cannot be held responsible for any gains or losses incurred from trades undertaken based upon information herein.
**The author holds no shares in the aforementioned companies, he is currently long: Agilent Technologies (A), Verigy, Ltd. (VRGY), Brasil Telecom Participacoes S.A. (BRP), ConocoPhillips (COP), and ChipMOS Taiwan (IMOS).
