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TheStreet Open House

A Closer Look at Quest Diagnostics, Lab Corp and Hologic

Stocks in this article: DGX LH HOLX

NEW YORK ( TheStreet) -- Diagnostics providers such as Quest Diagnostics (DGX - Get Report), Lab Corp (LH - Get Report) and Hologic (HOLX - Get Report) have long been sleepy and stable performers. While the Affordable Care Act may not send these stocks rocketing higher, it is likely to give them meaningful boosts to their revenue over the next 12 months.

For every individual diagnosis or treatment, there are often numerous diagnostics that must be run. But in many cases even very simple tests can be out of reach for those without insurance. Obamacare coverage is likely to result in much greater use of diagnostics for as many as 30 million new covered individuals.

However, it remains to be seen how pricing and reimbursements will be affected. Diagnostics providers have been understandably vocal against any changes that will affect pricing and margins, even though there may be a rise in volume that could more than offset declines in pricing.

Of the three diagnostic companies mentioned above, Quest is most likely going to be the safest and most stable long-term winner. At around 11 times earnings, the stock is fairly cheap, but is typically under-appreciated by the analysts.

For the first nine months of the year, the company threw off nearly half a billion dollars in operating cash flow, and it has a 2% dividend yield. Revenue has been fairly constant at around $1.8 billion per quarter, but following the onset of Obamacare, revenue could be due for a moderate increase. Gross margins are around 30% and net margins come in at around 20%, impressive for a company of this size.

In October, the company reported a slight revenue miss, resulting in numerous analyst downgrades. However, the share price has been only minimally affected. One key driver will be the recently launched BRCAdvantage gene sequencing test for hereditary breast and ovarian cancers.

The recent weakness in Quest revenue has made it a somewhat unloved stock for the short term. But this is likely to reverse itself over the next two quarters and the dividend means that investors get paid to wait.

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