Title: Friday POW! #275 — Pick of the Week: Quest Diagnostics (DGX) Source: Haymaker (David Hay's Substack newsletter, PAID) Author: The Haymaker Team (David Hay) Date: 2026-JUN-05 (prices/data as of 6/3/26) URL: https://haymaker.substack.com/p/friday-pow-275 Type: Written newsletter (no video / no timestamps). Paid subscriber content saved for personal study. The post ends with the full Haymaker portfolio as two image tables ("Buys" and "Trims/Holds" with price / cost / % change / rating); those holdings are transcribed into david-hay/portfolio.json and drive the master table's "Pundit portfolios" filter. ================================================================ Key Highlights (all prices and data as of writing on 6/3/26): - Stock at ~$190; 52-week range $164.65-$213.50; market cap ~$21.7B; down ~11% from 52-week high - Q1 2026: revenue $2.90B, +9.2% YoY; organic revenue growth 9.0%; requisition volume +10.9%; adj. EPS $2.50, +13.1% - FY2026 guidance raised: revenue $11.78-$11.90B (+6.8-7.8%); adj. EPS $10.63-$10.83; cash from operations ~$1.75B - Fresenius + Corewell contribution: ~$330M annual revenue, ~3.3% of total revenue guide at scale - AI Companion: 350,000+ patient interactions since early Q1 2026 rollout; customer service agent productivity +40% within quarter - Invigorate productivity program: 3% annual cost savings target; AI and automation driving margin expansion - Forward P/E ~18x on adj. EPS guidance midpoint $10.73; EV/EBITDA ~11x; dividend yield 1.7%; payout ratio 36% - Cash from operations guidance ~$1.75B; capex ~$550M; implied FCF ~$1.2B; FCF yield ~5.5% at current market cap - Analyst consensus: Buy; average price target ~$223; high target $245 (BofA); Jefferies $225; Truist $225 — implying ~16% upside - Advanced diagnostics double-digit growth: brain health, cardiometabolic, oncology testing leading - Project Nova (technology transformation) expenses weighted to H2 2026 - Next earnings: late July 2026 (Q2); debt offering priced April 27, 2026 — refinancing at favorable terms This Quest Is No Impossible Dream This week's POW! wades into an industry we haven't historically highlighted very often: healthcare. However, given the strong business performance, virtually no AI threat, and continued tailwinds from an aging population, we think the company's future is bright. Quest Diagnostics is the largest independent clinical laboratory network in the United States, processing approximately 550,000 patient specimens per day across a national infrastructure of approximately 2,250 patient service centers, 150 rapid response laboratories, and a hub-and-spoke logistics operation that took decades to build and would cost billions to replicate. The company runs the gamut from routine blood panels ordered by primary care physicians to complex genomic and oncology testing that requires specialized instrumentation and interpretive expertise that only scale can sustain. In Q1 2026, Quest grew revenue 9.2% to $2.90 billion (9.0% organically, with requisition volume up 10.9%) and raised its full-year 2026 guidance to $11.78 to $11.90 billion in revenue and $10.63 to $10.83 in adjusted diluted EPS. This marks the company's fifth consecutive guidance raise in five quarters. The stock is trading at approximately $192 (as of this writing), down from a 52-week high of $213.50, at roughly 18x forward earnings and a 1.7% dividend yield. We think the selloff since the April 21 earnings release, where the stock fell approximately 5% on a clean beat with a guidance raise, is a pretty good entry point. The bull case on Quest is not exactly a glamorous one, but it is durable. It is a clear beneficiary of the rapid aging of the Boomer demographic cohort. This is a business with an entrenched infrastructure advantage, growing volumes from demographic and chronic disease tailwinds that are not going away, a direct commercial partnership with Fresenius Medical Care and Corewell Health that is adding $330 million in annual revenue at scale, and a technology transformation underway. DGX launched its AI Companion deployed to 350,000 patient interactions since early Q1, which saw customer service agent productivity improve 40% and cost reductions at the same time volumes are growing. The market sold it on an earnings beat because the forward gross margin guidance reflects transitional partnership volume at lower initial margins. We think that reaction misreads the earnings quality and understates what a fully integrated, technology-enhanced Quest looks like in 2027 and 2028. Valuation At $190, Quest trades at approximately 18x forward earnings on the fiscal 2026 guidance midpoint of $10.73 in adjusted EPS, and at roughly 11x trailing EV/EBITDA. While neither multiple is extraordinarily compressed by historical standards, Quest has historically traded at 17-22x forward earnings. Therefore, the current price represents the low end of that range at a point in time when volume growth is accelerating, guidance has been raised five consecutive quarters, and the partnership and technology investments are transitioning from cost to return. The free cash flow yield of approximately 5.5% at current prices, on $1.75 billion in cash from operations minus $550 million in capex, is the most compelling entry-point metric. A 5.5% FCF yield on a business growing 7% to 8% annually, with improving margins and no balance sheet stress, is a pretty attractive setup in our view. The analyst community maintains strong conviction despite the post-earnings selloff. BofA raised its target to $245 from $225 following the Q1 report. Jefferies raised their upside goal to $225, maintaining a Hold rating; similarly Truist upped theirs to $225, also as a Hold. The consensus average target of approximately $223 implies approximately 16% upside from current levels. None of the 22 analysts covering the stock has a Sell rating. The bear case is not that Quest's business deteriorates (that's very unlikely); rather, it is that the multiple stays where it is while earnings grow modestly. That is a reasonable concern in a challenging macro environment. But it is not, in our view, a sufficient reason to avoid a business with these characteristics at these prices. As you can see in the following table, earnings are in an upside range expansion phase and they are predicted to continue that pattern. Per the next section, you'll see that fundamentals and technicals are in sync. Technicals The stock is trading near its 200-day moving average of approximately $185 to $190, having recovered partially from the post-earnings low of approximately $164.65. The 52-week range of $164.65 to $213.50 puts the current price in the lower half, at a level that has historically served as strong support given Quest's consistent earnings delivery. The April 27 public debt offering (refinancing existing obligations at favorable terms) is a balance sheet management event that does not change the investment thesis but reflects management confidence in the company's creditworthiness. Q2 earnings in late July are likely to be the next major catalyst. From a technical analysis standpoint, DGX registered a key breakout early last year. From there, its stock chart has continued to move from lower left to upper right. That's a good thing and, in our view, it's even better that it has experienced a controlled pull-back to its up-trend line. Moreover, DGX has also recently made a new all-time high (ATH). Team Haymaker admits a special affinity for those events. For one thing, it means there is no "overhead supply", in technical analysis speak. The practical implication is that there are no shareholders who paid a higher price and might be tempted to sell in order to finally break even. Arguing the Other Side The most credible bear case is reimbursement risk. The Protecting Access to Medicare Act (PAMA) created a mechanism by which Centers for Medicare/Medicaid (CMS) can reduce Medicare reimbursement rates for lab tests based on private payor pricing data. The laboratory industry has consistently lobbied against the implementation of PAMA cuts that it argues would price routine testing below sustainable economics. A significant PAMA cut cycle, which has been deferred multiple times but not permanently avoided, would hit Quest's revenue per requisition on a large portion of its Medicare-reimbursed volume. Management has embedded some reimbursement pressure into guidance, but a larger-than-expected cut cycle could compress revenue growth and margins simultaneously. Additionally, the partnership model introduces a bit of execution risk. Integrating Fresenius dialysis clinic laboratory operations and building a joint venture laboratory with Corewell Health requires operational coordination across organizations with different cultures, systems, and priorities. We think the transition margin compression is manageable if the integration proceeds as planned. If the integration takes longer than guided, the margin improvement thesis delays accordingly. Wage inflation and fuel costs are near-term headwinds that management has quantified but also cannot fully control. Higher fuel costs added $7 to $10 million to 2026 guidance expenses. Wage pressure in laboratory and logistics roles is structural in the current labor market and is the primary offset to the productivity gains from automation. If wage inflation runs above the rate at which automation reduces headcount, the operating leverage story is probably slower to materialize. Even considering these risks, at 18x forward earnings, a 5.5% FCF yield, a 1.7% and growing dividend, and five consecutive quarters of guidance raises, we believe a substantial amount of execution skepticism is already baked into the price. Quest has not missed earnings guidance in a meaningful way in recent years nor lost a major customer. In our view, the post-earnings selloff reflects transitional margin optics and near-term investment costs, not a change in the fundamental health of the business. The Bottom Line So, as we like to ask, what are we actually buying here? The largest independent clinical laboratory network in America, with growing volume from demographic and chronic disease tailwinds that compound for decades. DGX is trading at 18x forward earnings and a 5.5% FCF yield, with five consecutive guidance raises, and a technology transformation producing 40% customer-service productivity gains in its first quarter of deployment. In sum, a business that grows because people get older, sicker, and more health-aware (forces that do not reverse) at a price that reflects temporary margin optics rather than full-blown deterioration. We are gradual accumulators at current levels, or lower, with a price target of $215 to $225 over 12-18 months, representing a re-rating to approximately 20x forward earnings on 2027 estimated adjusted EPS of approximately $11.50 to $12.00, which is within the historical range for a business executing at this level. The catalyst is the continued compounding of volume growth, partnership maturation, and technology-driven margin improvement that becomes impossible to ignore once it is visible in two or three consecutive quarters of reported results. As we've seen, that's the way fundamentals have been trending for over a year. In the case of DGX, we believe the trend will continue to be a shareholder's friend. The Haymaker Team ---------------------------------------------------------------- Portfolio (image tables at the end of the post; one row per lot): Buys (Ticker / Price / Cost / % Change / Rating): AAP $56.67 $58.78 -3.59% B; ACN $177.68 $178.31 -0.35% SB; AIG $75.16 $69.82 7.65% B; ANGPY $11.68 $8.27 41.23% SB; APA $36.81 $29.91 23.07% B; BA $216.14 $209.89 2.98% SB; BABA $121.88 $162.11 -24.82% SB; BOLSY $8.93 $9.85 -9.34% B; CPNG $15.73 $20.16 -21.97% SB; DECK $107.85 $104.58 3.13% B; EL $82.74 $86.82 -4.70% B; EQT $54.19 $64.96 -16.58% SB; EQT $54.19 $57.00 -4.93% B (04/20/26 Buy); EXE $92.84 $77.49 19.81% B; FXI $34.80 $30.30 14.85% SB; GOLD $39.92 $21.60 84.81% SB; GOLD $39.92 $47.01 -15.08% (04/24/26 Strong Buy); HBRIY $3.80 $4.09 -7.09% SB; IJH $74.24 $62.30 19.17% B; J $123.43 $128.30 -3.80% SB; KWEB $26.47 $32.24 -17.90% SB; LNC $34.63 $40.25 -13.96% SB; MTB $223.24 $187.34 19.16% B; NFG $77.98 $91.03 -14.34% SB; NHPEF $4.40 $3.74 17.65% SB; NOW $113.31 $102.00 11.09% B; NTR $67.43 $47.89 40.80% SB; NTR $67.43 $76.05 -11.33% SB (03/19/26 Buy); PALL $22.68 $18.06 25.58% B; PEP $143.72 $157.06 -8.49% SB; QNST $12.21 $11.25 8.53% SB; RRC $39.53 $35.56 11.16% SB; RYAAY $57.06 $50.11 13.87% B; RYAAY $57.06 $53.36 6.93% B (05/15/26 Buy); SRUUF $19.02 $14.50 31.17% SB; SRUUF $19.02 $18.55 2.53% SB (11/12/25 Buy); UBER $70.60 $84.67 -16.62% B; USO $132.66 $67.19 97.44% B; WDOFF $18.20 $9.36 94.44% B; WMMVY $29.30 $32.08 -8.67% B; XLE $58.01 $48.38 19.90% B; YACAF $4.99 $5.20 -4.04% B Trims/Holds (Ticker / Price / Cost / % Change / Rating): AA $72.36 $36.79 96.68% H/T; AEM $165.47 $82.93 99.53% H; AESI $16.99 $8.84 92.19% H/T; AG $17.32 $8.27 109.43% H; AGI $35.90 $18.73 91.67% H; AR $35.90 $27.88 28.77% H; BTU $28.82 $14.50 98.76% H; CB $326.30 $249.26 30.91% H; CDE $16.62 $10.00 66.20% H; CHKP $135.95 $151.87 -10.48% H; CKHUY $8.55 $6.74 26.85% H; CLF $13.47 $12.12 11.14% H; COPX $82.43 $46.67 76.62% H; CRH $105.37 $73.23 43.89% H; CSCO $123.53 $53.50 130.90% H/T; CVE $28.61 $15.54 84.11% H; DAL $79.01 $50.44 56.64% H; EEM $65.33 $46.12 41.65% H/T; EQNR $37.23 $22.59 64.81% H; EWJ $91.76 $68.20 34.55% H; EWS $29.51 $18.21 62.05% H; EWZ $34.08 $28.21 20.81% H; FANG $197.25 $160.87 22.61% H; FNV $221.40 $125.82 75.97% H; FSLR $278.52 $133.03 109.37% H; GDX $80.16 $49.34 62.46% H; GDXJ $102.93 $60.43 70.33% H; GOOG $367.01 $168.68 117.58% T; HBM $26.77 $10.46 155.93% H; HCC $100.27 $53.23 88.37% T; HP $38.08 $37.92 0.42% H; IBKR $83.71 $21.70 285.76% T; IBM $282.45 $188.00 50.24% H; IJS $130.76 $86.27 51.57% H; JPM $311.84 $175.65 77.53% H; LMT $523.50 $463.87 12.85% H; MO $72.46 $49.71 45.77% H; NE $45.84 $31.83 44.02% H; NEM $101.65 $42.21 140.82% H; NHYDY $12.22 $7.36 66.03% H; NOW $113.25 $102.00 11.03% H/T; PALAF $7.33 $4.93 48.68% T; PARR $55.61 $16.18 243.70% T; PBR $17.75 $11.85 49.79% H/T; PSLV $21.72 $9.82 121.18% H; RIG $5.97 $3.74 59.63% H; RTX $181.80 $113.95 59.54% T; SBSW $10.24 $4.76 115.13% H; SHEL $85.81 $70.97 20.91% H; SLB $55.09 $36.60 50.52% H; STT $161.25 $112.95 42.76% H; TMUS $178.21 $164.27 8.49% H; URNJ $25.02 $18.22 37.32% H; USO $132.64 $67.19 97.41% H; VAL $88.85 $47.72 86.19% H/T; XAR $273.94 $220.00 24.52% H Post note: "Despite its presence on both lists, our NOW position is technically a Hold/Trim (for the moment). We recently posted a Portfolio Update indicating that while there might be more upward movement ahead, some readers might want to trim at present. Either way, we'll de-duplicate the entry in next week's post."