Zacks_Analysts' Blog : Quest Acquires S.E.D. Medical - Analyst Blog

Recently Quest Diagnostics (DGX">DGX) completed the acquisition of S.E.D. Medical, a unit of Lovelace Health System that provides full-service drugs-of-abuse testing. The deal with Lovelace was announced earlier this month although financial terms were not disclosed.

S.E.D. Medical, with approximately 450 employees, performs over 7,500,000 reportable tests and handles over 1,000,000 patient encounters annually.

Quest Diagnostics accordingly, is looking forward to continuing with the strong growth prospects of S.E.D. Medical which the company expects to synergize with its strategy of further expanding in high-potential areas.

The acquisition deal will enable Quest Diagnostics to expand its presence especially in New Mexico by managing in-patient labs for the 4 Lovelace hospitals and serving Lovelace Health Plan members.

Quest Diagnostics is currently focusing on latent areas such as drugs-of-abuse testing, gene-based, esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. The company is witnessing higher demand for these tests compared to routine tests.

In order to bolster this specialized business, Quest has been pursuing accretive acquisitions. Other recent deals like the Athena and Celera acquisitions are expected to strengthen the company’s foothold in gene-based and esoteric testing.

A solid cash base enables Quest Diagnostics to pursue suitable acquisitions. In the last reported quarter, Quest Diagnostics had $110.8 million in cash and cash equivalents. Underlying cash from operations was strong at $338 million during the quarter.

After taking into account restructuring and integration costs, cash from operations was $360 million compared with $330 million in the year-ago period. In the near future, Quest Diagnostics would be looking for more acquisitions in the laboratory space that will expand its customer base and be immediately accretive to earnings.

Recommendation

We appreciate Quest Diagnostics’ move to emphasize on the specialized side of its business and are satisfied with the progress made so far in this respect. Apart from that, we are encouraged by Quest Diagnostics’ efforts to improve its sales effectiveness and strengthen its relationship with health plans and payors.

Additionally, we are also positive about the ongoing CEO succession process which is expected to improve the company’s performance going forward. However, the company continues to witness challenges with testing volume. Moreover, the competitive landscape is tough with the presence of Laboratory Corporation of America Holdings (LH">LH).

We currently have a Neutral recommendation on Quest Diagnostics and Lab Corp. Both stocks retain a short-term Zacks #3 Rank (Hold).