Investing.com -- Fitch Ratings has raised the Long-Term Issuer Default Rating (IDR) of Quest Diagnostics, Inc. (NYSE: DGX ) from ’BBB’ to ’BBB+’, indicating a stable outlook. The upgrade also applies to the company’s senior unsecured revolving facility and senior unsecured notes.

The upgrade reflects Quest Diagnostics’ strong operational performance after the pandemic, with consistent growth and stable margins. The rating is supported by the steady demand for clinical testing, the company’s leading market position, and a history of maintaining a consistent financial policy. Fitch anticipates the company’s mergers and acquisitions (M&A) activities to be more measured over the forecast period, lower than the past two years and aligned with historical levels.

Quest Diagnostics holds a leading position in the fragmented U.S. clinical laboratory market, which allows for efficient operations and margin improvement after M&A. The company’s cost position is a competitive advantage due to the significant role pricing plays in customer decisions.

Fitch expects advanced diagnostic tests to play a key role in supporting the company’s long-term growth targets. These tests, in areas such as oncology, cardiometabolic health, women’s & reproductive health, brain health, and autoimmune disorders, constituted approximately 9% of 2024 revenue.

In terms of leverage, Fitch expects Quest Diagnostics to maintain EBITDA leverage around mid-2x range. However, leverage is expected to be higher at 2.9x at the end of 2025 due to the acquisitions in 2024 and decrease to 2.7x in 2026 from EBITDA growth.

Fitch assumes that Quest Diagnostics will allocate $2 billion towards M&A and $2.4 billion towards shareholder returns between 2025 and 2028. This is significantly lower than the $3.25 billion and $5.3 billion spent, respectively, between 2021 and 2024. The company is also expected to spend $2.2 billion on capital expenditure over the same period, primarily to fund Project NOVA, an initiative introduced earlier this year to transform the company’s order-to-cash process.

The company’s ’BBB+’ ratings reflect its leading position and scale in the competitive U.S. clinical laboratory industry. This position enables it to maintain EBITDA leverage around 2.5x over the long term, despite allocating most free cash flow towards acquisitions, dividends and share repurchases.

Fitch’s key assumptions include revenue of about $10.8 billion in 2025 and annual organic revenue growth between 2% and 3% during 2025 to 2028. EBITDA margin expansion of roughly 100 basis points is expected over the rating horizon, driven by test mix increasing towards higher margin tests, contributions from higher-margin outreach lab acquisitions, and decreased dilution from Haystack. The effective interest rate is expected to be approximately 4.5% over the forecast period.

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