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DGX Closes Dignity Health Acquisition

Zacks Equity Research

In line with its announcement in Apr 2013, Quest Diagnostics (DGX) recently completed the acquisition of lab-related clinical outreach service operations of Calif-based Dignity Health. However, the hospital-based laboratories of Dignity Health are not included in the deal.

Although the financial terms of the deal were not disclosed, Quest Diagnostics believes that this acquisition (the third laboratory business acquired in 2013) is consistent with its strategy of delivering 1%–2% growth from acquisitions. The acquisition is also a part of the company’s recently initiated five-pronged strategy, which includes disciplined capital deployment.

Quest Diagnostics expects the transaction to be neutral to 2013 adjusted earnings and modestly accretive to the 2014 bottom line. It also expects this acquisition to contribute around 0.5% to its annualized revenues. This acquisition includes patient service centers and associated businesses. It would enable the company to perform testing through its clinical laboratories in California and Nevada.

The company true to its strategy has been acquiring businesses lately. In May, the company acquired the toxicology and clinical laboratory business from Concentra, a subsidiary of Humana, Inc. Again in January the company acquired the clinical and anatomic-pathology outreach laboratory businesses of Mass-based UMass Memorial Medical Center.

We appreciate the company’s recently implemented restructuring programs that would drive operational efficiency and accelerate growth. Effective from Jan 1, 2013, Quest Diagnostics is reporting through two new business groups – Diagnostic Information Services and Diagnostic Solutions – replacing the company’s traditional reporting structure.

We are optimistic about the company’s strategy to refocus on Diagnostic Information Services along with the organizational changes implemented by Quest Diagnostics’ new CEO, Steve Rusckowski. We also expect these changes to successfully add synergies to its ongoing $500 million restructuring initiative, associated with the Invigorate program.

However, we remain cautious about Quest Diagnostics as it continues to face weak testing volume. Concerns also linger about the soft industry trends due to a decline in physician office visits, flat pricing and low organic revenues. The stock retains a Zacks Rank #3 (Hold).

While we prefer to remain on the sidelines on Quest Diagnostics, other medical device stocks worth a look are Myriad Genetics Inc. (MYGN), Natus Medical Inc. (BABY) and Haemonetics Corporation (HAE). All the three stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on DGX

Read the Full Research Report on MYGN

Read the Full Research Report on HAE

Read the Full Research Report on BABY

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