22 Nov Part Three Compare and contrast the governance and organizational structure of the companies studied and analyze the impact these structures have on the valuations that were analyzed in
Part Three
Compare and contrast the governance and organizational structure of the companies studied and analyze the impact these structures have on the valuations that were analyzed in Part Two.
I need to Analyze on Quest Diagnostics Company(DGX)-governance and organizational structure of the company studied and analyze the impact these structures have on the valuations that were analyzed in Part Two.(Part Two Document-Please find attached Document-Please analyse quest diagnostics valuations- Price/earnings (P/E) ratio, Price/free cash flow (P/FCF) ratio, EV/EBITDA , Market/book (M/B) ratio, price/earnings-to-growth (P/E/G) ratio -All these ratios related to quest Diagnostics you can find in the attached document.)
Andrew Morrissey
Nitin Narra
Lindsey Row
MBA 675
Team Project, Part Two
St. Ambrose University
DaVita Inc., Laboratory Corporation of America Holdings (LabCorp), and Quest Diagnostics are three leading companies in the healthcare facilities and services industry. The following is an analysis of each company’s market value ratios (or valuation multiples) followed by an overall ranking of the companies by market performance and value for shareholders. “Market value ratios relate a firm’s stock price to its earnings, cash flow, and book value per share. Market value ratios are a way to measure the value of a company’s stock relative to that of another company,” (Brigham & Ehrhardt, 2020, p. 117). In order to establish consistency throughout our analysis, all market value ratios were sourced on the same day (November 1, 2022) and from the same sources (Stock Analysis, MacroTrends and Zacks Investment Research).
Price/earnings (P/E) ratio is calculated by dividing a company’s latest closing price by its most recent earnings-per-share (EPS). The P/E ratio is a simple way to assess whether a stock is over or undervalued and is the most widely used valuation measure. The following P/E ratios were sourced on November 1, 2022 from Stock Analysis. DaVita’s P/E ratio was 9.56 (Stock Analysis, 2022). DaVita is on the lower end when compared to the average P/E ratio for S&P 500 companies, which is 25 (Murphy, 2022). This can be seen as an attractive valuation to investors, as having a high P/E ratio could mean the stock is currently being overvalued. LabCorp’s P/E ratio was 11.95 (Stock Analysis, 2022). While still lower than the industry average, LabCorp’s P/E ratio can indicate that LabCorp is a riskier investment but there are also strong growth prospects. Lastly, Quest Diagnostics’ P/E ratio was 14.05 (Stock Analysis, 2022). Again, this is lower than the S&P average but the highest among our companies. A higher P/E is typically better for the firm but poses more risk or overvaluation for investors.
Price/free cash flow (P/FCF) ratio is calculated by dividing a company’s latest price-per-share by its free cash flow-per-share. The P/FCF ratio examines a company’s ability to generate free cash flow which affects its stock prices. The average P/FCF for S&P 500 companies is 14.05. Similar to the P/E ratio, a value less than this average is generally considered good. The following P/FCF ratios were sourced on November 1, 2022 from Stock Analysis. DaVita’s P/FCF ratio was 5.5 (Stock Analysis, 2022). This shows that DaVita’s stock is cheap in relation to its free cash flow. Quest Diagnostics’ P/FCF was 11.99 (Stock Analysis, 2022), which shows that its stock is moderately priced in relation to its free cash flow. Lastly, LabCorp’s P/FCF was 13.58 (Stock Analysis, 2022). While this ratio is still considered favorable because it is below the average, this does indicate that LabCorp stock could be overvalued. These ratios align with each company’s price-per-share, with DaVita stock being the lowest ($70.38 at closing) and LabCorp’s the highest ($222.55 at closing) of the group.
EV/EBITDA is calculated by dividing a company’s enterprise value by its EBITDA (Earnings before interest, taxes, depreciation, and amortization value). This valuation ratio assesses a company’s value, including debt and liabilities, to true cash earnings. EV/EBITDA is helpful when comparing companies within the same industry. Generally, an EV/EBITDA below 10 is considered favorable (Maverick, 2022). The higher a company’s EV/EBITDA, its stock can be viewed as overpriced. The following EV/EBITDA ratios were sourced on November 1, 2022 from Stock Analysis. LabCorp’s EV/EBITDA was 7.97, DaVita’s was 9.14 and Quest Diagnostic’s was 9.21 (Stock Analysis, 2022). Each company’s ratios would be considered healthy and a good investment for shareholders.
Market/book (M/B) ratio (or price/book ratio) is another helpful ratio for investors. M/B ratio is calculated by dividing a company’s market price-per-share by its book value-per-share. M/B ratio takes into account a company’s past and present through the cumulative amount stockholders have invested and investor’s expectations of future cash flows (Brigham & Ehrhardt, 2020, p. 119). The following M/B ratios were sourced on November 1, 2022 from MacroTrends. LabCorp’s M/B ratio was 2.04, Quest Diagnostics was 2.59 and DaVita’s was 10.6 (MacroTrends, 2022). While all values are above 1 (which is generally favorable), DaVita’s M/B ratio is more than triple those in its peer group. This is not a good look for DaVita as it shows the market value could be too high and may be ready for a fall.
Lastly, price/earnings-to- growth (P/E/G) ratio is calculated by dividing a company’s P/E ratio by its annual EPS growth. P/E/G ratio can help determine the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected growth. Generally, a P/E/G ratio under 1 is considered favorable. The following P/E/G ratios were sourced on November 1, 2022 from Zacks Investment Research. Quest Diagnostics’ P/E/G ratio was 0.76, LabCorp’s was 1.61 and DaVita’s was 1.64 (Zacks Investment Research, 2022). From this we can assume that LabCorp and DaVita stock could be overvalued, which is consistent with previous valuation ratio findings.
In order to efficiently rank our companies, we first gave each company a ranking of 1-3 for each individual ratio, with 1 being “first” or the most favorable and 3 being “last” or the least favorable. Scores for each company were then added together for a final number, with the lowest score being most favorable. In total, LabCorp received a score of 9, Quest Diagnostics received a score of 10 and DaVita received a score of 11. We find that our rankings for Part Two are the consistent with our findings in Part One, which is as follows:
1. LabCorp
2. Quest Diagnostics
3. DaVita
References
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory & practice. Cengage Learning.
DaVita, Inc. (DVA) financial ratios and metrics. (n.d.). Retrieved November 1, 2022, from https://stockanalysis.com/stocks/dva/financials/ratios/
DaVita, Inc. Price to Book Ratio 2010-2022: DVA. Macrotrends. (n.d.). Retrieved November 1, 2022, from https://www.macrotrends.net/stocks/charts/dva/davita/price-book
Laboratory Corporation of America Holdings (LH) financial ratios and metrics. (n.d.). Retrieved November 1, 2022, from https://stockanalysis.com/stocks/lh/financials/ratios/
Laboratory of America Holdings Price to Book Ratio 2010-2022: LH. Macrotrends. (n.d.). Retrieved November 1, 2022, from https://www.macrotrends.net/stocks/charts/LH/laboratory-of-america-holdings/price-book
Maverick, J. B. (2022, July 8). What is considered a healthy EV/EBITDA ? Investopedia. Retrieved November 5, 2022, from https://www.investopedia.com/ask/answers/072715/what-considered-healthy-evebitda.asp Murphy, C. B. (2022, September 21). Using the price-to-earnings ratio and PEG to assess a stock. Investopedia. Retrieved November 5, 2022, from https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/
Quest Diagnostics Incorporated (DGX) financial ratios and metrics. (n.d.). Retrieved November 1, 2022, from https://stockanalysis.com/stocks/dgx/financials/ratios/
Quest Diagnostics Price to Book Ratio 2010-2022: DGX. Macrotrends. (n.d.). Retrieved November 1, 2022, from https://www.macrotrends.net/stocks/charts/dgx/questdiagnostics/price-book
Zacks Investment Research. (2022, November 1). DaVita (DVA) PEG Ratio. Zacks Investment Research. Retrieved November 1, 2022, from https://www.zacks.com/stock/chart/LH/fundamental/peg-ratio-ttm
Zacks Investment Research. (2022, November 1). Laboratory Corp. of America (LH) PEG Ratio. Zacks Investment Research. Retrieved November 1, 2022, from https://www.zacks.com/stock/chart/LH/fundamental/peg-ratio-ttm
Zacks Investment Research. (2022, November 1). Quest Diagnostics (DGX) PEG Ratio. Zacks Investment Research. Retrieved November 1, 2022, from https://www.zacks.com/stock/chart/LH/fundamental/peg-ratio-ttm
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