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Here's Why You Should Retain Quest Diagnostics (DGX) Stock
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Quest Diagnostics Incorporated (DGX - Free Report) is well poised for growth in the coming quarters backed by its robust demand for COVID-19 testing and well-positioned strategy. However, soft industry trends, an unfavorable market scenario leading to lower organic testing volumes and stiff competition remain concerns.
In the past year, shares of this Zacks Rank #3 (Hold) company have gained 13.9% compared with 9.3% growth of the industry and 18.2% rise of the S&P 500.
The largest provider of commercial laboratory services in North America has a market cap of $17.12 billion. The company projects 26.5% growth for the next five years. The company surpassed estimates in the trailing four quarters. It has a four-quarter earnings surprise of 8.39%, on average.
Riding on the company’s current business growth and bullish near-term prospects, this stock is worth holding on to, for now.
Key Growth Catalysts
COVID-19 Test Capacity Increases: We are upbeat about Quest Diagnostics’ growing demand for COVID-19 testing despite decline in its base testing volumes. Approximately 12.5 million molecular tests and 1 million serology tests were performed in the fourth quarter of 2020, contributing approximately 29% to volume growth. The company exited the fourth quarter, averaging about 130,000 COVID-19 molecular tests and 10,000 serology tests per day.
Growth Acceleration Strategy Bodes Well: Quest Diagnostics is moving ahead with regard to its accelerating growth strategy, which consists of five elements. In terms of the first element, over the past three years, the M&A pipeline has remained strong and the company achieved its goal to exceed 2% growth CAGR from acquisitions in the base business. The recently-closed deals of the Memorial Hermann outreach and MACL acquisitions have positioned Quest Diagnostic well to achieve M&A growth target in 2021.
Going by the second element, Quest Diagnostics continues to extend health plan contracts and tie-ups with hospital health systems. With respect to the other elements, Quest Diagnostics announced that it will manage laboratory operations and perform reference testing for 11 Hackensack Meridian Health hospitals. It also continued to execute health plan strategy by shifting the dialogue to value-based contracting efforts from price.
Downsides
On the flip side, there are some factors that have been deterring the stock’s rally of late.
Volume Decline Intensifies: We are worried about pressure on volume owing to a difficult macro-economic situation and pricing, which constitutes the primary risk for Quest Diagnostics. In October and November 2020, organic testing volumes ordered in base business were down by mid-to-high single digits from the prior year. We also expect that a low level of employment and slow growth of commercially-insured lives will continuously impact the company’s overall improvement, until the economy rebounds.
Competitive Landscape: Quest Diagnostics faces intense competition primarily from Laboratory Corporation of America, other commercial laboratories and hospitals. Hospitals control an estimated 60% of the diagnostic test market, compared to Quest Diagnostic’s 15% share. As a result, Quest Diagnostics and other commercial labs compete with hospital-affiliated labs, primarily on the basis of the quality of service.
Estimate Trends
Quest Diagnostics is witnessing a positive estimate revision trend for the current year. In the past 90 days, the Zacks Consensus Estimate for earnings has moved 6.72% north to $11.27.
The Zacks Consensus Estimate for first-quarter 2021 revenues is pegged at $2.69 billion, suggesting 47.83% growth from the year-ago reported number.
The Cooper Companies has a projected long-term earnings growth rate of 11%.
Invacare has an estimated long-term earnings growth rate of 57%.
McKesson has a projected long-term earnings growth rate of 7%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2022.
Image: Bigstock
Here's Why You Should Retain Quest Diagnostics (DGX) Stock
Quest Diagnostics Incorporated (DGX - Free Report) is well poised for growth in the coming quarters backed by its robust demand for COVID-19 testing and well-positioned strategy. However, soft industry trends, an unfavorable market scenario leading to lower organic testing volumes and stiff competition remain concerns.
In the past year, shares of this Zacks Rank #3 (Hold) company have gained 13.9% compared with 9.3% growth of the industry and 18.2% rise of the S&P 500.
The largest provider of commercial laboratory services in North America has a market cap of $17.12 billion. The company projects 26.5% growth for the next five years. The company surpassed estimates in the trailing four quarters. It has a four-quarter earnings surprise of 8.39%, on average.
Riding on the company’s current business growth and bullish near-term prospects, this stock is worth holding on to, for now.
Key Growth Catalysts
COVID-19 Test Capacity Increases: We are upbeat about Quest Diagnostics’ growing demand for COVID-19 testing despite decline in its base testing volumes. Approximately 12.5 million molecular tests and 1 million serology tests were performed in the fourth quarter of 2020, contributing approximately 29% to volume growth. The company exited the fourth quarter, averaging about 130,000 COVID-19 molecular tests and 10,000 serology tests per day.
Growth Acceleration Strategy Bodes Well: Quest Diagnostics is moving ahead with regard to its accelerating growth strategy, which consists of five elements. In terms of the first element, over the past three years, the M&A pipeline has remained strong and the company achieved its goal to exceed 2% growth CAGR from acquisitions in the base business. The recently-closed deals of the Memorial Hermann outreach and MACL acquisitions have positioned Quest Diagnostic well to achieve M&A growth target in 2021.
Going by the second element, Quest Diagnostics continues to extend health plan contracts and tie-ups with hospital health systems. With respect to the other elements, Quest Diagnostics announced that it will manage laboratory operations and perform reference testing for 11 Hackensack Meridian Health hospitals. It also continued to execute health plan strategy by shifting the dialogue to value-based contracting efforts from price.
Downsides
On the flip side, there are some factors that have been deterring the stock’s rally of late.
Volume Decline Intensifies: We are worried about pressure on volume owing to a difficult macro-economic situation and pricing, which constitutes the primary risk for Quest Diagnostics. In October and November 2020, organic testing volumes ordered in base business were down by mid-to-high single digits from the prior year. We also expect that a low level of employment and slow growth of commercially-insured lives will continuously impact the company’s overall improvement, until the economy rebounds.
Competitive Landscape: Quest Diagnostics faces intense competition primarily from Laboratory Corporation of America, other commercial laboratories and hospitals. Hospitals control an estimated 60% of the diagnostic test market, compared to Quest Diagnostic’s 15% share. As a result, Quest Diagnostics and other commercial labs compete with hospital-affiliated labs, primarily on the basis of the quality of service.
Estimate Trends
Quest Diagnostics is witnessing a positive estimate revision trend for the current year. In the past 90 days, the Zacks Consensus Estimate for earnings has moved 6.72% north to $11.27.
The Zacks Consensus Estimate for first-quarter 2021 revenues is pegged at $2.69 billion, suggesting 47.83% growth from the year-ago reported number.
Key Picks
A few better-ranked stocks from the broader medical space are The Cooper Companies, Inc. (COO - Free Report) , Invacare Corporation and McKesson Corporation (MCK - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.
The Cooper Companies has a projected long-term earnings growth rate of 11%.
Invacare has an estimated long-term earnings growth rate of 57%.
McKesson has a projected long-term earnings growth rate of 7%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2022.
Click here for the 4 trades >>