April 22, 2008 - Quest Diagnostics (NYSE:DGX) is the nation's leading provider of diagnostic testing, information and services. The company reported especially strong quarterly results on Monday, seeming to remind investors of the value of dependable profits at a time when story stocks can unravel.

The AmeriPath acquisition was a big reason for Quest's report of a 32% increase in first quarter profits. Earnings of 71 cents per share beat the consensus by 2 cents. Revenue was up 17% to $1.78 billion for the three month period. Quest also reaffirmed its financial guidance for 2008: EPS of $3.00-$3.20 and revenue growth of 9%.

This news is bolstering optimism that Quest has turned the corner on its tough times. The company lost a major managed care customer that accounted for 7% of revenue to its rival, Lab Corp. of America (NYSE:LH) so the growth characteristics of cancer diagnostics are an important element to restoring investor confidence in Quest.

The stock price has been more down than up lately. At $48.32 currently, DGX is back in the neighborhood it was trading in during 2004. While one quarter's results are hardly a guarantee, revenue trends in medical diagnostics are fairly predictable and the business does appear to be back on solid footing.

In addition to traditional blood tests and cancer diagnostics, Quest offers drug testing services that help employers crack down on employee drug abuse and applicant screening. Another growth area is gene-based testing, and Quest also services clinical trials.

A few years ago, Quest spent $934 million to buy LabOne, adding health screening and risk assessment services to life insurance companies. The diagnostics business is fairly steady with impressive margins--operating margins are in the neighborhood of 17%--and through acquisitions Quest should be able to deliver an attractive combination of growth and dependability. Earnings per share are expected to increase at an average rate of 14% over the next five years. That's very impressive growth for such a large company.

The stock isn't cheap, perhaps reasonable is a better description. DGX is selling for 13.4 times forward earnings. Not too bad for a company that grows earnings consistently in the double digits and has very little in the way of ups and downs to worry about. Other impressive valuation numbers include a Price/Sales Ratio (PSR) of 1.4 and Return on Equity of 17.5%. It's no value investor's dream, but it does offer a combination of growth and dependability at a decent price.

This is one of those rare companies that is growing larger and getting more efficient. If you're looking for a medical stock with solid profits and respectable growth, look into DGX and make your own diagnosis.

- James Hale