Quest (DGX)

Healthcare diagnostics company Quest Diagnostics (NYSE:DGX) reported Q4 CY2025 results topping the market’s revenue expectations, with sales up 7.1% year on year to $2.81 billion. The company’s full-year revenue guidance of $11.76 billion at the midpoint came in 3.3% above analysts’ estimates. Its non-GAAP profit of $2.42 per share was 2.6% above analysts’ consensus estimates.

Company Overview

Processing approximately one-third of the adult U.S. population's lab tests annually, Quest Diagnostics (NYSE:DGX) provides laboratory testing and diagnostic information services to patients, physicians, hospitals, and other healthcare providers across the United States.

The testing and diagnostics services industry plays a crucial role in disease detection, monitoring, and prevention, serving hospitals, clinics, and individual consumers. This sector benefits from stable demand, driven by an aging population, increased prevalence of chronic diseases, and growing awareness of preventive healthcare. Recurring revenue streams come from routine screenings, lab tests, and diagnostic imaging, with reimbursement from Medicare, Medicaid, private insurance, and out-of-pocket payments. However, the industry faces challenges such as pricing pressures, regulatory compliance, and the need for continuous investment in new testing technologies. Looking ahead, industry tailwinds include the expansion of personalized medicine, increased adoption of at-home and rapid diagnostic tests, and advancements in AI-driven diagnostics that enhance accuracy and efficiency. However, headwinds such as reimbursement uncertainties, competition from decentralized testing solutions, and regulatory scrutiny over test validity and cost-effectiveness may impact profitability. Adapting to evolving healthcare models and integrating automation will be key for sustaining growth and maintaining operational efficiency.

Quest Diagnostics' primary competitor is Laboratory Corporation of America Holdings (NYSE: LH), commonly known as Labcorp. Other competitors include hospital-based laboratories, physician-office laboratories, and specialty testing providers like Bio-Reference Laboratories (a subsidiary of OPKO Health, NYSE: OPK).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $11.04 billion in revenue over the past 12 months, Quest has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Quest’s sales grew at a tepid 3.2% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector and is a tough starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Quest’s annualized revenue growth of 9.2% over the last two years is above its five-year trend, suggesting some bright spots.

We can dig further into the company’s revenue dynamics by analyzing its number of requisition volumes. Over the last two years, Quest’s requisition volumes averaged 10% year-on-year growth. Because this number is in line with its revenue growth, we can see the company kept its prices fairly consistent.

This quarter, Quest reported year-on-year revenue growth of 7.1%, and its $2.81 billion of revenue exceeded Wall Street’s estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to grow 2.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Quest has managed its cost base well over the last five years. It demonstrated solid profitability for a healthcare business, producing an average operating margin of 15.7%.

Analyzing the trend in its profitability, Quest’s operating margin decreased by 8 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q4, Quest generated an operating margin profit margin of 13.8%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Quest, its EPS declined by 2.4% annually over the last five years while its revenue grew by 3.2%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into Quest’s earnings to better understand the drivers of its performance. As we mentioned earlier, Quest’s operating margin was flat this quarter but declined by 8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Quest reported adjusted EPS of $2.42, up from $2.23 in the same quarter last year. This print beat analysts’ estimates by 2.6%. Over the next 12 months, Wall Street expects Quest’s full-year EPS of $9.85 to grow 5.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Quest has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 12.3% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that Quest’s margin dropped by 4.6 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle.

Quest’s free cash flow clocked in at $307 million in Q4, equivalent to a 10.9% margin. The company’s cash profitability regressed as it was 2.1 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Quest hasn’t been the highest-quality company lately because of its poor bottom-line (EPS) performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 11.5%, higher than most healthcare businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Quest’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Quest reported $420 million of cash and $6.38 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.20 billion of EBITDA over the last 12 months, we view Quest’s 2.7× net-debt-to-EBITDA ratio as safe. We also see its $264 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Quest’s optimistic full-year revenue guidance, which blew past analysts’ expectations. We were also happy its revenue outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock remained flat at $192.13 immediately after reporting.

Updated: February 10, 2026 at 6:58 AM EST

When considering an investment in Quest, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Quest isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue growth was uninspiring over the last five years, and analysts don’t see anything changing over the next 12 months. And while its growth in requisition volumes was solid, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its declining operating margin shows the business has become less efficient.

Quest’s P/E ratio based on the next 12 months is 18.4x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $199.31 on the company (compared to the current share price of $192.13).