DGX | Best Idea Long | COVID Testing Sustained Alongside Re-Opening (+/+)
Thesis
- The key to our thesis to DGX’s guidance for the near elimination of COVID volume in the coming months in the midst of yet another wave of infections. But instead of lockdowns, we expect the continued emergence of in-person care.
- We also expect the continued migration back to less socially distanced environments such as offices, which will exacerbate COVID spread along with influenza off the near-zero levels of the 2020-2021 season.
- Should COVID testing remain elevated and the recovery in the base business remains intact, we believe company estimates could be revised significantly higher.
- It also seems more likely that COVID will require monitoring for years to come, delaying a COVID comp already in estimates.
- On the call, management reported that DGX processed 43,000 molecular tests per day in the last 2 weeks of June.
- By July 22, 2021, the average tests per day had risen and according to our data, continues to rise with an average of 745,664 molecular tests per day through July 27, 2021.
- We can also see that DGX has lost share with Covid testing QoQ. The loss is likely due to an influx of point-of-care solutions and regional labs that entered the space throughout the pandemic.
- At the end of our analysis, our average molecular tests per day estimate is likely at the higher end of management's original range. We have chosen not to raise our estimate for later quarters.
- These averages will be affected by the prevalence of this year’s flu season and additional precautionary measures instituted in response to the current outbreaks.
- Management reported that base business volume reached the pre-covid baseline in 2Q21. Going forward, we would expect the base business to progress at the 2%-3% average which is standard for central labs. We do not expect the Delta variant to cause further disruptions to the base business.
- Pent-up demand volume looks to be finally showing up. We expect elevated utilization going forward.
Valuation
- Although the correlation to price is relatively similar between EV to sales and EPS, we chose to value DGX using its EV/Sales multiple which historically trades between 2.0x and 2.6x.
- EV/Sales also affords us the opportunity to separate Covid revenue to create a blended multiple.
- While the multiple remains stable historically, we believe that the potential for prolonged covid testing, faster than expected recovery in the base business, and meaningful contributions from the PLS business in 2022 will enact a series of positive estimate revisions and further multiple expansion (to the top of the range).
- Based on the business’ potential ceiling and utilizing the midpoint of its historical trading range, we have modeled 2021 revenue to $9.823B versus consensus of $9.679B and 2022 revenue of $8.665B versus consensus of $8.578B, yielding 10-15% upside from the current price.
Upside scenario, 15-30%
Catalysts
- COVID testing tracker (based on CDC data)
- We receive daily US covid testing data which can be analyzed and used to forecast DGX’s average covid tests per day with a high degree of accuracy. Given that the low point of guidance assumes an average of 20k covid tests per day, this dataset will give us a good indication of the current pace.
- Hedgeye proprietary data updates
- We have developed a number of proprietary and publicly available data sources which, in combination, will provide an accurate representation of Quest’s landscape.
- These tools include a forecast algorithm for Quest’s organic requisition volume, app downloads, and daily active users for the MyQuest app, several medical lab time series which the BLS updates monthly.
- DGX bi-monthly media statements on covid-19
- These updates will not only provide support/opposition for our thesis around current covid testing levels but will also provide a bogey for us to test our covid tracker
- Conference appearances & M&A announcements
- DGX is set to speak next at the Morgan Stanley Global Health Care Conference on Sept 9, 2021, where investors will have an opportunity to ask questions on a number of the thesis points we laid out above.
- These opportunities, as well as additional announcements of continued M&A afford management the opportunity to prove further commitment to their story.
All data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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